Business Entities - C-Corporations and S-Corporations - Similarities

In the state of California, the following are the business entities that are allowed: 

1. Sole Proprietorship
2. Limited Liability Partnership
3. General Partnership
4. Limited Partnership
5. Limited Liability Company
6. Corporations (C-Corporations and S-Corporations)

In the next few blogs, I will be going over the filing requirements for each of these entities, how the entities are created and what forms are required for the entities to file their taxes.  I will also go over the major advantages and disadvantages of each one.  Keep in mind that I am not an attorney, so all I am giving is my opinion.  If you want a legal opinion, please consult an attorney.  I do not dispense legal advice.

C-Corporations and S-Corporations - Similarities

1. Limited Liability Protection - Both of these legal entities have limited liability protection.  All Shareholders who purchase their ownership by purchasing shares of the corporation's stock are limited in their liability.  They can not be held personally liable.  They also can only lose their investment, or the amount of money paid for the corporation stock.
2. Separate Entities - Both of these legal entities are just that separate legal entities from any of the shareholders, directors or officers of the corporation.
3. Filing Documents - In order to create the legal entities, both C-Corporations and S-Corporations require papers be filed with the state in which they are incorporating. The documents are typically called "Articles of Incorporation" or "Certificate of Incorporation" depending on the state, 
4. Structure - Both legal entities have shareholders, directors and officers.  Shareholders are the owners of the company whom elect the board of directors.  The board of directors oversee and direct corporation affairs and business.  The directors elect the officers of the corporation.
5. Corporate Formalities - Both legal entities are required to adopt bylaws, issue stock, hold shareholder and board of director meetings, filing annual reports, and paying expenses.  All of these are internal and external formalities that both of these type of legal entities are required to accomplish.

Business Entities - Corporations

In the state of California, the following are the business entities that are allowed: 

1. Sole Proprietorship
2. Limited Liability Partnership
3. General Partnership
4. Limited Partnership
5. Limited Liability Company
6. Corporations (C-Corporations and S-Corporations)

In the next few blogs, I will be going over the filing requirements for each of these entities, how the entities are created and what forms are required for the entities to file their taxes.  I will also go over the major advantages and disadvantages of each one.  Keep in mind that I am not an attorney, so all I am giving is my opinion.  If you want a legal opinion, please consult an attorney.  I do not dispense legal advice.

Corporations
A California corporation generally is a legal entity which exists separately from its owners. While normally limiting the owners from personal liability, taxes are levied on the corporation as well as on the shareholders. The sale of stocks or bonds can generate additional capital and the longevity of the corporation can continue past the death of the owners. Legal Counsel should be consulted regarding the variety of options available.

To form a corporation in California, Articles of Incorporation must be filed with the California Secretary of State’s office. Forms for the most common types of Articles of Incorporation are available on our Forms, Samples and Fees webpage. You may use the form or prepare your own statutorily compliant document.

The C corporation is the standard corporation, while the S corporation has elected a special tax status with the IRS. It gets its name because it is defined in Subchapter S of the Internal Revenue Code. To elect S corporation status when forming a corporation, Form 2553 must be filed with the IRS and all S corporation guidelines met.

In Monday's blog, I will discuss the similarities between C corporations and S corporations.  In Wednesday's blog I will discuss what makes the two different.  There are several differences and similarities that I felt that we needed to spend a few extra days on this business type. 

Business Entities - Limited Liability Company

In the state of California, the following are the business entities that are allowed: 

1. Sole Proprietorship
2. Limited Liability Partnership
3. General Partnership
4. Limited Partnership
5. Limited Liability Company
6. Corporations (C-Corporations and S-Corporations)

In the next few blogs, I will be going over the filing requirements for each of these entities, how the entities are created and what forms are required for the entities to file their taxes.  I will also go over the major advantages and disadvantages of each one.  Keep in mind that I am not an attorney, so all I am giving is my opinion.  If you want a legal opinion, please consult an attorney.  I do not dispense legal advice.

Limited Liability Company
A California LLC generally offers liability protection similar to that of a corporation but is taxed differently.  Domestic LLCs may be managed by one or more managers or one or more members.  In addition to filing the required documents with the Secretary of State, an operating agreement among the members as to the affairs of the LLC and the conduct of its business is required.  The LLC does not file the agreement with the Secretary of State but maintains it at the office where the records are kept.  To form an LLC in California, Articles of Organization (Form LLC–1) must be filed with the California Secretary of State’s office.

An LLC is a hybrid business entity that blends elements of partnership and corporate structures. The LLC’s main advantage over a partnership is that, like the owners (shareholders) of a civil law corporation, the liability of the owners (members) of an LLC for debts and obligations of the LLC is limited to their financial investment. However, like a general partnership, members of an LLC have the right to participate in management of the LLC, and profit or losses flow through to its members.  An LLC may not be formed by certain types of businesses that provide professional services requiring a state professional license, such as legal or medical. For California income tax purposes, an LLC will be classified as a partnership if it has more than one owner and will be treated as a disregarded entity if it has only one member.  However, an LLC is allowed to elect to be treated (taxed) as a corporation. To be taxed as a corporation, the LLC files an election on Federal Form 8832, Entity Classification Election, with the Internal Revenue Service. California conforms to the federal entity classification regulations commonly known as "check-the-box regulations" that allow an LLC to elect to be taxed as a corporation. 

Business Entities - Limited Partnership

In the state of California, the following are the business entities that are allowed: 

1. Sole Proprietorship
2. Limited Liability Partnership
3. General Partnership
4. Limited Partnership
5. Limited Liability Company
6. Corporations (C-Corporations and S-Corporations)

In the next few blogs, I will be going over the filing requirements for each of these entities, how the entities are created and what forms are required for the entities to file their taxes.  I will also go over the major advantages and disadvantages of each one.  Keep in mind that I am not an attorney, so all I am giving is my opinion.  If you want a legal opinion, please consult an attorney.  I do not dispense legal advice.

Limited Partnership
A California Limited Partnership may provided limited liability for some of the partners.  There must be at least one general partner who acts as the controlling partner and one limited partner whose liability is normally limited to the amount of control or participation of the limited partner.  General partners of a Limited Partnership have unlimited personal liability for the Limited Partnership's debts and obligation.  To form an LP in California, a Certificate of Limited Partnership (Form LP–1) must be filed with the California Secretary of State’s office.

The Limited Partnership files taxes by using the Form 1065 for the Federal Government and a 565 for the state government.  This partnership does have a $800 minimum tax due at the state level.  Each of the partners receives a K-1 with their share of the income/loss which they transfer to their own personal taxes.

The Limited Partnership is a flexible form of business.  It is designed primarily for specific professional services.  The partners decide the structure of the organization and the distribution of profits and losses.  a written partnership agreement is advisable. 

Business Entities - General Partnership

In the state of California, the following are the business entities that are allowed: 

1. Sole Proprietorship
2. Limited Liability Partnership
3. General Partnership
4. Limited Partnership
5. Limited Liability Company
6. Corporations (C-Corporations and S-Corporations)

In the next few blogs, I will be going over the filing requirements for each of these entities, how the entities are created and what forms are required for the entities to file their taxes.  I will also go over the major advantages and disadvantages of each one.  Keep in mind that I am not an attorney, so all I am giving is my opinion.  If you want a legal opinion, please consult an attorney.  I do not dispense legal advice.

General Partnership
This is the simplest form of business for two or more people.  This is basically a Sole Proprietorship for two or more people.

A California GP must have two ore more person engaged in a business for profit.  Except as otherwise provided by law, all partners are jointly and severally for all obligations of the partnership unless agreed by the claimant.  Partners make the business decisions of the Partnership together.  Profits are taxed as personal income for the partners.  To register a GP at the state level, a Statement of Partnership Authority (Form GP–1) must be filed with the California Secretary of State’s office. Interesting fact:  registering a General Partnership at the state level is optional.

The General Partnership files taxes by using the Form 1065 for the Federal Government and a 565 for the state government.  This partnership does not have a minimum tax due at the state level.  Each of the partners receives a K-1 with their share of the income/loss which they transfer to their own personal taxes.

The following are some things to consider regarding a General Partnership.  A partnership is a flexible form of business and relatively easy to set up.  The partners will decide the structure of the organization and the distribution of profits and losses. A formal, written partnership agreement is advisable.  A separate bank account should be established to run the operations.  A partnership allows more than one owner, unlike a sole proprietorship.  The cost to form a partnership is generally less expensive than forming a corporation.  The items of income, deductions, and credits flow through from the partnership to each partner’s California Schedule K-1, Partner’s Share of Income, Deductions, Credits, and distributive shares of property, payroll, and sales.  Each partner is responsible for paying taxes on their distributive share.  In a general partnership, each partner is personally liable for all business debts and lawsuits.  A partnership exists as long as the partners agree it will and as long as there are at least two partners, one of whom is a general partner.

Business Entities - Limited Liability Partnership

In the state of California, the following are the business entities that are allowed: 

1. Sole Proprietorship
2. Limited Liability Partnership
3. General Partnership
4. Limited Partnership
5. Limited Liability Company
6. Corporations (C-Corporations and S-Corporations)

In the next few blogs, I will be going over the filing requirements for each of these entities, how the entities are created and what forms are required for the entities to file their taxes.  I will also go over the major advantages and disadvantages of each one.  Keep in mind that I am not an attorney, so all I am giving is my opinion.  If you want a legal opinion, please consult an attorney.  I do not dispense legal advice.

Limited Liability Partnership
An LLP is a partnership that engages in the practice of public accountancy, law, architecture, engineering or land surveying.  It also can provide services or facilities to a California registered LP that practices public accountancy or law or to a foreign LLP.

An LLP is required to maintain certain levels of insurance by law.  To register an LLP in California, a Form LLP-1, an Application to Register a Limited Liability Partnership must be filed with the California Secretary of State’s office.

An LLP is a form of ownership in which all the partners receive limited liability protection. An LLP is similar to a general partnership in that all the partners can take an active role in managing the day-to-day affairs of the business. The LLP form of ownership is limited in the State of California to persons licensed to practice in the fields of public accountancy, law, architecture, engineers or land surveyors.  In order to form in California, an LLP must first register with the California Secretary of State. An LLP formed in another state must register with the California Secretary of State prior to conducting business in the state.

In an LLP, there are two classes of partners, general partners and limited partners.  The general partners have unlimited liability and the limited partners have limited liability.  The partners will decide the structure of the organization and the distribution of profits and losses. A formal, written partnership agreement is advisable.  Because it is a form of Partnership, the Partnership will file a form 1065 to file their taxes with the IRS.  The items of income, deductions, credits, and shares of property, payroll, and sales flow through from the partnership to each partner’s California Schedule K-1. Each partner is responsible for paying taxes on their distributive share.  A LLP remains in effect based on partners agreeing to a termination date.  LLPs do not pay income tax but they are subject to the annual tax of $800.

Business Entities - Sole Proprietorship

In the state of California, the following are the business entities that are allowed:

1. Sole Proprietorship
2. Limited Liability Partnership
3. General Partnership
4. Limited Partnership
5. Limited Liability Company
6. Corporations (C-Corporations and S-Corporations)

In the next few blogs, I will be going over the filing requirements for each of these entities, how the entities are created and what forms are required for the entities to file their taxes.  I will also go over the major advantages and disadvantages of each one.  Keep in mind that I am not an attorney, so all I am giving is my opinion.  If you want a legal opinion, please consult an attorney.  I do not dispense legal advice.

Sole Proprietorship
Sole Proprietorship is basically going into business for yourself as yourself.  This is the government allowing you as a person to own and operate your own business.  You will have total control and make all decisions on your business.  You receive all profits from the business and you are responsible for all taxes and liabilities of the business.

If you call the business something other than the person who owns it name, you need to file a form called a Fictitious Business Name Statement with the county where the principal place of business is located.  Example:  You are Joe Smith.  You want to open a Card Shop.  You want to call it Joe's Card Shop.  You will need to file a Fictitious Business Name Statement, because it does not have your full name as part of the business.  No formation documents are filed with the California Secretary of State's Office.  You can request a tax identification number from the IRS to identify your new business.  I suggest this so that you do not need to give everyone your social security number when they ask for the business' tax identification number.

Taxwise, it is easy for you to file the taxes.  You file it along with your own personal taxes on your 1040 (and 540 for the state of California).  To capture the business information, you will file a separate schedule C for each separate business you operate as a sole proprietorship.  The total of all of the schedule Cs will be entered on line 12 as income (or loss if negative).

Advantages of this type of business is you own this entity, and no one can take it away from you.  You also make all the decisions.  This means who to do business with, how to advertise, who you want to employ (if any one) and so on.  All decisions are yours.  You also get all of the profit.

Disadvantages of this type of business is that you bear all of the liability.  For instance if you sign a year long lease and the business fails on month 2, you will still owe 10 more months of a lease you will have no use for the building.  If someone sues the business, they are suing you.  All expenses are your responsibility.  No getting out of it.  You also will need to pay Self employment tax.  This could mean putting some of your income aside and paying it to the government once a quarter.

Child and Dependent Care Tax Credit

If you paid someone to care for your child or other qualifying person so that you (and your spouse if filing jointly) could work or look for work, you may be able to take the credit.

Qualifying Person
- A child under the age of 13 whom you can claim as a dependent is a qualifying person.  If the child turned 13 this year, then the child would be a qualifying person for the part of the year that he was under 13.
- Your disabled spouse who was not physically or mentally able to care for himself.
- Any physically or mentally disabled person who was not able to care for himself or herself, whom you can claim as a dependent (or could claim as a dependent with certain exceptions).

Dependent Care Benefits
Dependent care benefits include:
-Amounts your employer paid directly to either you or your care provider for the care of your qualifying person(s) while you worked,
- The fair market value of care in a daycare facility provided or sponsored by your employer, and
- Pre-tax contributions you made under a dependent care flexible spending arrangement (FSA).
There is a maximum on the qualified expenses of two or more qualifying persons of $6,000.  This amount does not need to be split equally.

Who can take the Credit or Exclusion:

You can take the credit or the exclusion if all five of the following apply:

1. Your filing status may be single, head of household, qualifying widow(er) with dependent child, or married filing jointly. If your filing status is married filing separately, see Married Persons Filing Separately, later.

2. The care was provided so you (and your spouse if filing jointly) could work or look for work. However, if you did not find a job and have no earned income for the year, you cannot take the credit or the exclusion. But if you or your spouse was a full-time student or disabled, see the

instructions for lines 4 and 5, later.

3. The care must be for one or more qualifying persons.

4. The person who provided the care was not your spouse, the parent of your qualifying child, or a person whom you can claim as a dependent. If your child provided the care, he or she must have been age 19 or older by the end of 2015, and he or she cannot be your dependent. 

5. You report the required information about the care provider on line 1 and, if taking the credit, the information about the qualifying person on line 2.

Note that there is a maximum on the qualified expenses. For one person, the maximum qualified expenses is $3,000.  For two or more person(s), the maximum qualified expenses is $6,000.  The credit can be as much as 35% of the allowable expenses.  The percentage changes based on your income.  Lower income means a higher percentage of the allowable expenses, and higher income means a lower percentage of the allowable expenses.

You will need the Social Security Number of your qualifying person(s).  You will also need the Tax Identification Number or Social Security Number, name and address of the person who cared for your qualifying person and received the qualified expenses.

Claiming the Child Tax Credit

If you are the parent or guardian of a child, or you are someone who is in a position to claim a child on a tax return, you might be able to claim the child tax credit.  This is a tax credit that is refundable, which means that you can use this tax credit to get a refund from it and may be worth up to $1,000 to you.

This is one of a group of tax credits that are created for families with children in order to ease the financial burden.  Another one is called the "Child and Dependent Care Tax Credit".  Don't confuse this one with the Child and Dependent Care Tax Credit.  See my next blog for information on the Child and Dependent Care Tax Credit.

For the "Child Tax Credit", there are 7 "tests" that you must be able to pass in order to claim the tax credit.

Relationship Test – The dependent child must be either a son, daughter, stepchild, foster child, adopted child, brother or sister; or a descendant of any of these relations such as a grandchild, nephew, or niece.

Residency Test – The dependent child must have lived with the taxpayer for more than half the year (there are exceptions to this rule).  Some of the exceptions are short time absences, such as schooling.

Age Test – The dependent the child must be 16 years old or younger.  (The IRS calls this under 17 years of age, just to confuse the issue).

Support Test – The dependent child can not have provided for more than half of his or her own financial support.

Citizenship Test – The dependent child must be either a citizen or resident alien of the United States.

Dependency Test – The dependent child meets the criteria to be claimed as a dependent of the taxpayer

Income Tax Return Test – The dependent child must hot have filed a joint tax return or (files only to claim a tax refund).

Selling Your Home

To figure the gain or loss on the sale of your main home, you must know the selling price, the amount realized and the adjusted basis.  You subtract the selling expenses from the selling price to get the amount realized.  You subtract the adjusted basis from the amount realized to get the gain or loss.

Selling Prince - Selling expenses = Amount Realized

Amount Realized - Adjusted Basis = Gain or Loss

First step is to determine the sale price.  This is everything you received in exchange for your home.

You need to determine:

a.  All money (currency, check, wire transfer)

b.  The value of any notes, mortgages or other debts that the buyer agreed to assume (take over)

c.  Any real estate taxes the buyer paid on your behalf

d.  The fair market value of any other property or services you received

e.  Any amount you received for granting an option to buy your home, if the option was exercised

You add all of the the above up and this is your sales price

Second step is to determine your selling expenses.  These are the costs directly associated with selling your home.

a.  Any sales commissions (real estate agent's sales commissions for example)

b.  Any fees for a service that helped you sell your home without a broker

c.  Any advertising fees

d.  Any legal fees

e.  Any mortgage points or other loan charges you paid that would normally have been the buyer's responsibility.

Add the lines above these are your selling expenses.  Note, if you received payment/reimbursement from your employer, you will need to subtract the expenses that your employer paid or reimbursed to you.

Take the Selling Price of your home and subtract out the selling expenses to get the amount realized.

Third step is to determine your total basis.

a. The amount you paid for your home.  Remember to include the down payment and any amount you borrowed to pay for the home.

b. Any settlement fees or closing costs you paid when you bought your home, except for financing-related costs.  A fee paid for buying the home is any fee you whould have had to pay even if you paid cash.

c. Any real estate taxes or other costs you paid on behalf of the seller you bought your home from and which the seller never paid you back.

d.  Any amounts you spent on construction, renovation or other improvements that are still part of your home when you sell it, other than costs or repairs and maintenance.

e.  Any amounts you spent to repair damage to your home or the land it sits on

f.  Any special assessments for local improvements (such as special tax or condominium association assessments that are not merely for repairs or maintenance.

Add these lines, these are total basis.

Fourth step is to determine your basis adjustments

a. Any depreciation you took for using your home as a home office.

b. Any depreciation you took or could have taken for any business or investment (rental) use of your home other than home office use.

c. Any casualty losses (flood/fire damage) you claimed as a deduction on a federal tax return.

d.Any insurance payments you received or expect to receive for casualty losses

e. Any payments you received for granting an easements, conservation restriction or right-of-way

f. Any energy credits or subsidies that effectively paid you back for improvements you included in your total basis.

g. Any adoption credits you claimed, or any nontaxable payments from an employer-sponsored adoption assistance program you used for improvements you included in your total basis

h, Any District of Columbia first-time homebuyer credit you claimed

i. Any real estate taxes the seller paid on your behalf, only if you never reimbursed the seller

j.  Any mortgage points the seller paid for you when you bought your home if:

  - you bought your home between Janu 1, 1991 and April 4, 1994 and you deductd the points as home mortgage interest in the year they were paid  OR

  - you bought your home after April 3, 1994 (whether you deducted the points or not)

k. Any canceled or forgiven mortgage debt amount that was excluded due to a bankruptcy or insolvency and you did not have to declare as income

l.  Any sales tax you paid on your home and then claimed as a deduction on a federal tax return

m  The value of any temporary housing the builder of your home provided for you.

n.  Any gain you postponeed from a home you sold before May 7, 1997.

Add all of these lines, this is your basis adjustment

Figure your adjusted basis = total basis - basis adjustment

Figure your gain/loss = amount realized - adjusted basis

Who can I claim as my dependent?

One of the most asked and less known questions that I am asked is "Who can I claim as my dependent?"  The unfortunate truth is that this is an area where tax deductions can be missed or even misstated on tax returns.  There are actually a number of relatives who do not need to live with you to qualify for the deduction.  It could be that the grandmother you support during the year that did not live with you could be a hidden deduction.

A dependent must pass 5 tests to be your "qualifying child" and 4 tests to be your "qualifying relative" in order to be able to claim them as dependent.

Qualifying Child
•Relationship: Must be your child, adopted child, foster-child, brother or sister, or a descendant of one of these(grand or nephew).
•Residence: Must have the same residence for more than half the year.
•Age: Must be under age 19 or under 24 and a full-time student for at least 5 months. They can be any age if they are totally and permanently disabled.
•Support: Must not have provided more than half of their own support during the year.
•Joint Support: The child cannot file a joint return for the year.

Qualifying Relative
•They are not the “qualifying child” of another taxpayer or your “qualifying child”.
•Gross Income: Dependent earns less than $4,000 in 2015.
•Total Support: You provide more than half of the total support for the year.
•Member of Household or Relationship: The person must live with you all year as a member of your household or be one of the relatives that doesn’t have to live with you.

Relatives who do not have to live with you:
A person related to you in any of the following ways doesn't have to live with you all year as a member of your household to meet this test.

• Your child, stepchild, foster child, or a descendant of any of them (for example, your grandchild). (A legally adopted child is considered your child.)
• Your brother, sister, half brother, half sister, stepbrother, or stepsister.
• Your father, mother, grandparent, or other direct ancestor, but not foster parent.
• Your stepfather or stepmother.
• A son or daughter of your brother or sister.
• A son or daughter of your half brother or half sister.
• A brother or sister of your father or mother.
• Your son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

Any of these relationships that were established by marriage aren't ended by death or divorce. 

IRA Contribution thoughts

Understand that there are two different kinds of IRAs - Traditional IRA and Roth IRA.  In a Traditional IRA, you contribute pre-tax dollars.  You will pay taxes on it when the money is withdrawn.  You will also be able to reduce your taxable income on your taxes by contributing to a Traditional IRA.

A Roth IRA is just about the opposite.  You are taxed on the money going in, so you contribute post-tax dollars.  This will not reduce your taxable income by contributing to a Roth IRA.  One of the attractive features of a Roth IRA is that you do not need to pay taxes going out.  The money is all yours.

The IRA contribution limits for both 2015 and 2016 is $5,500.  If you are over the age of 50, you are permitted to contribute $1,000 more as a catch up.  Remember that this limit is per person and it is total for the year, not per IRA if you have 2 or more.  The limit also changes if your Adjusted Gross Income is more than $116,000 for single filers or $183,000 for married filers.  The limits go up to $117,000 and $184,000 for 2016.

Self employed people have a few more choices.  They can contribute to SEP IRAs or Simple IRAs.  The good news is that the Simple IRA has a contribution limit of $12,500 for 2015 and 2016.  The SEP IRAs let you contribute the lesser of $53,000 or 25% of your compensation or profit from your self employed business.

Tax Benefits for Seniors

When you grow old, you are signed up for a lot of perks that you really don't want.  Some of these can be grey hair, wrinkles, aches and pains, and perhaps even health problems.  This article is going to go through some of the tax benefits of growing old.  These are some of the benefits that the government gives away for free that are actually things that senior americans actually are looking forward.

Tax deductions for seniors. People age 65 and older are eligible for larger than usual standard deductions.  If you are single, head of household and over 65 you get to add $1,550 to the standard deduction if you are older than 65 and blind.  If you are married, you only get to add $1,250 but you can add it up to 4 times.  Two questions for each spouse.  If an individual or at least one member of a married couple is age 65 or older, you can deduct medical expenses that exceed 7.5 percent of your adjusted gross income, compared to 10 percent for younger taxpayers.  This would only be if you itemize your deductions.

Relaxed tax filing requirements. People 65 and older can bring in $1,550 more (or $1,250 more per spouse age 65 and older if filing jointly) than younger people before they are required to file a tax return. Seniors can have a gross income of up to $11,850 as individuals or $23,100 as part of a couple where both members are 65 or older before they are required to file a tax return.

Bigger retirement account limits. Workers age 50 and older can defer paying income tax on as much as $24,000 that they contribute to a 401(k) plan, $6,000 more than younger workers. The IRA contribution limit is also $1,000 higher for workers 50 and older, or $6,500 in 2016. The catch is that you are typically required to withdraw money from traditional retirement accounts and pay the resulting tax bill after age 70 1/2. However, retirees age 70 1/2 and older can avoid paying income tax on any amount up to $100,000 that they transfer directly from an IRA to a qualifying charity. Let me repeat that:  The money must transfer directly from an IRA to a qualifying charity.  It can't go into your checking account and you write a check.

No more early withdrawal penalty. Once you turn age 59 1/2, there's no more 10 percent penalty to withdraw money from your IRA.   If you leave your job at age 55 or later, you can begin taking penalty-free 401(k) withdrawals from the account associated with the job you left at an even earlier age.

Social Security payments. You can sign up for reduced Social Security payments as early as age 62 or claim the full amount you have earned at your full retirement age of 66 or 67, depending on your birth year. If you delay claiming your payments past your full retirement age up until age 70, you will earn delayed retirement credits that will further increase your monthly benefit.

Affordable health insurance. Retirees don't need to worry about finding a job that provides health coverage or the sometimes high out-of-pocket costs of health insurance plans purchased through state health insurance exchanges. Once you turn age 65, you can sign up for Medicare. Most retirees don't pay anything for their Part A hospital insurance. The premium for Medicare Part B, which covers doctor's visits and medical services, is $104.90 per month for most retirees in 2016 (although some beneficiaries pay more), which can be deducted from your Social Security check so you won't get a bill. Retirees can fill in some of the co-payments and deductibles by purchasing a supplemental plan and get their prescription drugs covered through Medicare Part D.

Earned Income Tax Credit for the State of California

The State of California now has its own version of the Earned Income Tax Credit (EITC).  The tax credit is refundable.  It can either help pay the tax that you owe or give you a refund from the leftover credit.  This tax credit starts with the 2015 tax year.

This credit is available to California households with adjusted gross incomes of less than $6,580 if there are no qualifying children, less than $9,880 if there is one qualifying child, or less than $13,870 if there are two or more qualifying children.  Your investment income, such as interest, dividends, royalties, and capital gains cannot exceed $3,400 for the entire tax year.  If you do not have a qualifying child, you (or your spouse if you file a joint return) must be between 25 and 65 years old at the end of the tax year.

You qualify for Cal EITC if:
•You have wages and adjusted gross income within certain limits, AND
•You, your spouse, and any qualifying children each have a social security number issued by the Social Security Administration that is valid for employment, AND
•You do not use the “married/RDP filing separately” filing status, AND
•You lived in California for more than half the tax year.

Your qualifying child must meet 3 criteria:

• Relationship - Is the taxpayer’s child, stepchild (whether by blood or adoption), foster child, sibling or stepsibling, or a descendant of any of them.
• Residence - Had the same principal residence as the taxpayer in California for more than half the tax year. Certain exceptions apply.
• Age - Child must be younger than the taxpayer and either a) under the age of 19 at the end of the tax year, or b) under the age of 24 if a full-time student for at least 5 months of the year. A permanently and totally disabled child may be included at any age

Personally, I do not think that many taxpayers are going to be able to take advantage of this tax credit.  I think that the income limits for California are too low.  I think that the California taxpayers should convince the legislature to raise the income limits to closer to what the Federal EITC limits are.

Quickbooks Online Comparison

Quickbooks Onlne allows business owners to be able to access Quickbooks via apps, either on a notebook, cellphone or other mobile device.  You, your employed bookkeeper or your Quickbooks accountant can login to your Quickbooks account from most web browsers.  Quickbooks does suggest using Google Chrome.  The online service helps many businesses that are service based.  Product based businesses may not be a good fit for the online service, but they can utilize other apps to help them streamline the shipping process.

QuickBooks Online benefits include:

• Both your employees and your accountant can share in the same data
• Quickbooks online updates itself constantly
• Online chat with help center
• e-mail of invoices and statements is automatic
• e-mail of reports can be setup to run automatically
• Your data is on the cloud.  No need to backup data - Intuit takes care of it
• Bank and credit card transactions download nightly
• iPad and iPhone apps are free with automatic sync
• Option to receive payments by credit card and ACH electronic payments

Three Subscription levels for Quickbooks Online:

Simple Start:  

• Track income and expenses
• Create estimates and invoices
• Sync bank accounts2 and apps

Essentials

• Track income and expenses
• Create estimates and invoices
• Sync bank accounts2 and apps
• Manage and pay bills
• Instant sales and profit reports

Plus

• Track income and expenses
• Create estimates and invoices
• Sync bank accounts2 and apps
• Manage and pay bills
• Instant sales and profit reports
• Track Inventory
• Prepare and print 1099s

I am a Quickbooks Proadvisor.  If you are interested in talking about getting Quickbooks Online started for your company, I am available to talk about it.  I can be reached via email at ricksmobiletaxservice@gmail.com or via phone at 714-723-2694.  Please leave a message if you do not reach me on the phone and I will give you a call back.

Rental Property

Two weeks ago, I worked on a return for a tax client who owned real estate.  She owned a 4 unit apartment building.  She lived in one of the units and rented out the other 3 units.  One of the uses of Schedule E is to report income and expenses related to renal property.

This week, I worked on a tax client that had quite a complicated return.  Part of the complication had to do with the fact that she had a property that she owned and rented out to a relative.  In order to let the IRS know about any rental income, a Schedule E is the form that you need to file with the IRS in order to report it.

Here is a link to the tax form we will be talking about, the schedule E:   IRS Form Schedule E

On a Schedule E, You list the address of up to three properties that you own.  You list the type of rental property, the rental days and personal use days during the year.  Personal use days are days that you use the property for your personal use.  The other days are known as rental days.  You can only deduct expenses for the percentage of the year that the rental property was available for rent.  You then list the rental income.  You then list the expenses that you had for the rental unit.  These are listed on the Schedule E, but I thought I would highlight some of the more popular.  Note that these costs start the day you convert this to a rental property.  This means when you start to offer the unit to the public as available to rent.

Advertising - this includes any costs associated with renting the unit, whether or not they were successful.  Auto and Travel - this can be any mileage or travel associated with collecting rent or showing the property.  It actually can be very lucrative as it is at 57.5 cents per mile.  Mortgage Interest - this is the amount of interest you pay to your bank.  Taxes - This is any taxes associated with the property and is usually Property taxes.  Utilities - these are any costs for utilities that you do not pass onto your tenant.  Management Fees - these are costs that you have to pay in order for your property to be managed.


If you fix something within your building, you need to decide whether it was a repair or it was an improvement.  A Repair can be deducted in one year.  An improvement can be depreciated over 27.5 years.  The IRS has said that improvements are anything that undergoes either a betterment, adaption or restoration.  If you are repairing normal wear and tear to a building, it is a repair.  But if you are making a major improvement and increasing the resale value, you need to classify this as an improvement.  Improvements increase the basis of a property.  The basis is basically what you bought the property for plus any improvements less the depreciation of a property.  Another related expense is depreciation.  You can depreciate the purchase of the building and any improvements.  You need to consider when they were done and depreciate them over 27.5 years.  This is a major write off so it is important to keep good accounting records regarding improvements.

Some advantages of having a rental property are that this is money that you have received.  You can reduce your income on such schedule a deductions as mortgage interest, travel and property taxes without having to have your deductions together be more than the standard deduction.  You also can have your standard deduction on the 1040 and have the ability to reduce your income on the schedule e.  In otherwords you can have both.

Tax Preparer Requirements and things to watch out for

When you selected the tax preparer that you currently use, what type of questions did you ask this person?  How did you find out whether this person who is trustworthy or not?  In the last few weeks, I have read many articles that are stating that Enrolled Agents are the only people who you can trust to do your taxes.  In my opinion, you need to go a little deeper than only looking at the training of the person.  You need to find out the person's journey as well as his history.

The IRS has a new program that started in 2014 called the Annual Filing Season Program.  This is a voluntary program that all tax preparers who are not attorneys, certified public accountants or enrolled agents are eligible to join.  To be eligible for this program you must register with the IRS as a tax preparer and obtain a PTIN or Preparer's Tax Identification Number.  You must also take at least 18 hours of a refresher course.  (I live in California, my state requires 20 hours in a CTEC approved educator course).

In California, the state that I am licensed in, in order to become a tax preparer, you must do the following.  First, you must take a 60 hour course from a CTEC approved provider within 18 months of applying.  Second, you must purchase a $5,000 tax preparer bond from an insurance/surety agent.  Third, you must obtain a Preparer's Tax Identification Number.  This requires you pay a fee to the IRS of $50.  Lastly, in California you must register with CTEC and pay their $33 fee.  Each year in order to renew, we are required to take a 20 hour refresher course.

By requiring all of the fees and education, the IRS and CTEC in my state, have done all that they can in order to make sure that unqualified preparers and preparers who are dishonest are weeded out.  However, you know just as well as I do that there will be ones who get through and are going to be out there.  There are dishonest people in all of the designations that the IRS has - Attorneys, CPA, Enrolled Agents and Tax Prepaerers.  In my opinion, you need to protect yourself by asking questions.

Check the person's qualifications - Does your preparer have a PTIN?  All preparers are required to have a PTIN.

Check the preparer's history - Does the Better Business Bureau have any reports of questionable returns or shady dealings with any clients?  For those with a licensing board, you should check whether or not his/her license is current and whether he/she had had any complaints.

What is the preparer's fee structure?  Watch out for any preparer who's fees are a percentage of your refund.  Reputable preparers have fees based on the documents that they prepared.  Also, you need to watch out for preparers who tell you that they can get a greater refund than others.

Check to make sure that the Preparer is accessible after tax season.  If the preparer is going to leave the country or move after that date, make sure you have a forwarding phone number and/or address.  Flying the coop is against the law.  It also is a red flag as to whether you want to use that person as a preparer.

The preparer should require information from you in order to do your return.  They should ask for forms you have recieved in the mail.  They should ask for your financial records or should ask for summary of your financial records when they interview you.  If they do not, it is a sure sign that they are making numbers up and might be falsifying records.

The preparer should never ask you to sign a blank return.  The preparer can be assessed a fine just for asking you to do this.  Besides, how do you know what the preparer is going to fill in the blanks?  By signing the return, you are agreeing that you agree with it and are responsible.

Make sure you review the entire return before you sign it.  The preparer also must sign the return and put his PTIN on the form.  If the return is being electronically filed, the EFIN must put a pin on the return that only they know.  This is called their electronic signature.

Current CTEC Regulations

Estimated Tax

According to the IRS website, estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.

Estimated tax is used to pay income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or estimated tax payments, you may be charged a penalty. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.

There are different forms that you need to use in order to figure out estimated tax.  If you are a sole proprietor, partner, S-corporation shareholder or self-employed individual, you need to use form 1040-ES in order to figure out and pay your estimated tax.  If you are a corporation, you will need to fill out form 1120-W.

The basic idea is that whichever entity that you are, you need to estimate your taxes for the next year.  You figure out what the deficit will be based on the income that you projected.  If the deficit or the amount of tax owed is going to be greater than $1,000, you need to make payments of 1/4 of the deficit each quarter.  If you end out owing greater than $1,000, you will be penalized for not paying enough estimated tax.  For corporations, this number is greater than $500.

If you have a W-2 job, you can get around having to pay estimated tax by asking your employer to take more taxes out of your paycheck to compensate.

You do not have to pay estimated tax for the current year if you meet all three of the following conditions.
•You had no tax liability for the prior year
•You were a U.S. citizen or resident for the whole year
•Your prior tax year covered a 12 month period

In order to figure out how much estimated tax you need to pay, you need to use the appropriate form to figure out your estimated tax.  To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.  Either you can do this or you can ask your tax professional.  The form will list the amounts that you need to pay the Federal Government and on which due dates.  Each quarter has its own due date that is listed on the form.

Some things to remember is that if you estimated your income incorrectly in the beginning of the year, you need to figure out the estimates again.  There is no need for you to over pay your estimated taxes, especially when the current year does not match your estimates.  If you were owing taxes for last year, you may also have to make payments on last years taxes owed.

Tax Information for new parents

You and your wife are expecting a child before the end of the year?  That is great!  Welcome to the wonderful world of parenthood.  With parenthood comes a lot of changes including diaper changes, putting a baby car seat in the car, and tax advantages.  What?  You had a child because you loved your wife and you didn't know that there were really great tax reasons to have a child?  

To get ready for tax time, the first thing that you need to do is request a social security number for your new bundle of joy  Without the social security number, you will not be able to claim your new son or daughter on your taxes.  Most hospitals have the forms on hand in order for you to apply for the social security number.  They usually hand you the form right after they had you the form for the birth certificate.  It is easiest to do at the hospital.

 Another benefit is the child tax credit.  Put simply, the government gives you $1,000 per child as a tax credit.  Tax credits are good.  This is money that will either pay any tax that you owe or add to your refund.  A second benefit is the dependent exemption.  This lowers your tax base, or the amount of money that you will have to pay taxes on.  You get to lower your tax base $4,000 per dependent.  Dependents are you, your wife, your son/daughter among other members of your family who depend on you to provide for them.

If you are not married, having a child could change your tax status.  Your tax status could change from Single to Head of Household.  In order to be head of household, you need to have a dependent and you need to provide at least 50% of what they need in order to survive.  The advantage of being in the Head of Household status?  Head of Household gives a better tax rate than single.  Don't get me wrong, it is not as good as Married Filing Jointly, but it is an improvement over Single.

Another benefit would be the Child and Dependent Care Tax Credit. Again, tax credit is good.  It means money to pay off the taxes the government says that you owe or money that will be added to your refund (This is referred to as a refundable credit).  The Child and Dependent Care Tax Credit requires you have a son or daughter and that you pay someone to watch him or her.  You will be able to get a credit of some of that money back as a credit.  It is a percentage that changes based on the amount you make.

One last tax benefit would be the Earned Income Tax Credit.  This tax credit requires you to work and make money.  You get a tax credit based on your income and the amount of dependents that live with you.

Taxes for same-sex couples, commonly referred to as registered domestic couples

In 2013, the Federal Government changed the way that same sex couples who are lawfully married are treated.  For federal tax purposes, the IRS looks to state or foreign law to determine whether individuals are married. The IRS has a general rule recognizing a marriage of same-sex spouses that was validly entered into in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex even if the married couple resides in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages.

For the tax year 2013, the IRS held that same-sex couples must file using a married filing separately or married filing jointly status.  The same-sex couples were allowed to admend their 2012 and 2011 tax returns after the ruling to married filing separately or married filing jointly status.  

What does this mean for same-sex or registered domestic partners going forward?  It means that if the same-sex couple was married in a state that recognizes same-sex marriage, they are married and need to file their tax returns under the status of married filing separately or married filing jointly.  Whether the state that they live in recognizes same-sex marriage is not an issue.  The determining factor on whether or not they are required to file as a married couple is which state they were married in and whether or not that state recognizes same-sex marriage.

A few questions have come up regarding this ruling.  One is whether or not one spouse of the same-sex marriage can be the dependent of the other.  The other question is whether or not one same-sex spouse can file head of household.  The answer is really very simple.  Look at the rules for traditional couples.  Traditional couples can not be the dependent of the other.  One member of a traditional couple can not file head of household.  Therefore, same-sex couples are the same and the answer to both questions is no.

The basic fundamental to bear in mind is that the rules that are currently applying to traditional couples are now going to also apply to same sex couples.  This will go for such questions as which parent will be able to claim the child on their tax return for a couple that files married filing separately.  The answer is the one who the child lives with a greater percentage of the time.  If this is equal, the tiebreaker is whichever parent has the greatest adjusted gross income.  If one spouse itemizes his or her deductions, then both spouses must itemize their deductions.  This is just the same as traditional couples.  

Tax Considerations for Active Military Personel

You are an active member of the military.  You and your spouse both work for the armed forces.  You have a family and you are stationed stateside on the same base as your spouse.  Being a typical military person, there are some considerations that you are probably not aware of or did not think of that you can deduct because of the expectations of your superior officers as well as the general public.

Itemized Deductions

The following will be a list of deductions that military personnel do not think about but are actually write offs due to the fact that they are not reimbursed for these job related expenses.  One of these is your appearance and how you must get a haircut more often than most people.  You have to keep yourself looking like a military person.  Another big ticket item is your uniform.  You are required to purchase your uniforms, boots, socks and all other parts of your uniform but are not reimbursed.  Another item is all of the patches that need to be sown on.  Many of our military people I find get the patches professionally sewn on.  The cost of paying a tailor or other professional to sew this on to your uniform can be claimed.  Another cost is dry cleaning.  You can write off the amount of the dry cleaning bill for the uniform.  This is because it is a job expectation and reasonable for your profession.

Special EITC Rules

You do not have to report your nontaxable pay you receive as a member of the Armed Forces as earned income for EITC. Examples of nontaxable military pay are combat pay, the Basic Allowance for Housing (BAH), and the Basic Allowance for Subsistence (BAS). The amount of your nontaxable combat pay is on your Form W-2, in box 12, with code Q.  But, you and your spouse can each choose to have your nontaxable combat pay included in your earned income for EITC. Including it as earned income may decrease the amount of tax you owe and may mean a larger refund. Calculate your taxes with the combat pay as earned income and without to find out what's best for you.  If you make the election, you must include in earned income all nontaxable combat pay you received. You can't choose to include only a part of the nontaxable combat pay in earned income.

Special Tax Considerations for Veterans

Disabled veterans may be eligible to claim a federal tax refund based on either an increase in the veteran's percentage of disability or the combat-disabled veteran applying for, and being granted, Combat-Related Special Compensation, after an award for Concurrent Retirement and Disability.

To do so, the disabled veteran will need to file the amended return, Form 1040X, Amended U.S. Individual Income Tax Return, to correct a previously filed Form 1040, 1040A or 1040EZ. An amended return cannot be e-filed. It must be filed as a paper return. Disabled veterans should include all documents from the Department of Veterans Affairs and any information received from Defense Finance and Accounting Services explaining proper tax treatment for the current year.

It is only in the year of the Department of Veterans Affairs reassessment of disability percentage (including any impacted retroactive year) or the year that the CRSC is initially granted or adjusted that the veteran may need to file amended returns.

 As you can see, there are many things to consider when you are serving in the military.  There are a lot of deductions that you might not think about.  I also included some special EITC rules and Special Tax Considerations for Veterans.  The important thing, especially for the deductions is to keep good records of what you are spending so that you can make sure to write off the total amount.