Tax Regulations

Do You Sell Online? Know Your Tax Obligations

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Many people today are turning to internet as a way to connect with potential buyers for all kinds of things, like clothing, electronics, cars, antiques, collectibles, and even used household items. Depending on the situation, you could have tax obligations if you sell online.

Is It a Business?

The IRS draws a distinction between what it calls “the Internet equivalent of an occasional garage or yard sale” and an “online auction seller business.”

Example.

Richard is moving and decides to sell online a plant stand and a snow blower he won’t need anymore through an online auction site. He sells the items for less than what he originally paid for them. Richard’s “losses” are not deductible because he sold “personal use” items, and he need not report his sales for tax purposes.

In contrast, an individual who has recurring sales and purchases items for resale with the intention of making a profit may be operating an online auction seller business.

Example.

Maria routinely scours the city where she lives looking for bargains on handmade jewelry and scarves. She puts her weekly finds up for sale on an Internet auction site, hoping to make a profit. Maria has started an online auction business and needs to report her business income and expenses on her tax return.

Selling Appreciated Assets

Online auction sales of art, antiques, collectibles, or other assets for more than they cost result in reportable gains. Depending on the specific situation, the gains would be considered either business income or capital gains.

Selling Depreciated Business Assets

If you sell online depreciated business assets you might have ordinary gains or capital gains, depending on the situation. You will need to include Form 4797, Sales of Business Property with your tax return.

Connect with us today for all the latest and most current tax rules and regulations.

Missed the Tax Deadline? Filing a Past-Due Tax Return

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You missed the April filing tax deadline. What now?

For whatever reason, you didn’t file an income tax return by the April tax deadline. Don’t wait until next year, and don’t think that the IRS won’t notice. You need to do something about it now. If you didn’t file because you didn’t think you’d have enough money to pay your tax bill (or you waited too long and simply couldn’t complete your tax preparation), you could have applied for an extension. The IRS still expects you to send in what you think you’ll owe, but if you pay at least 90 percent with the extension, you may avoid some penalties. You’ll then have six months to pay all taxes due and turn in your tax return.

At the very minimum, complete and send in the Form 4868 by the April deadline with some payment if this happens again. The IRS wants to hear from you at filing time.

Making Good

File and pay as quickly as you can, whether or not you can pay the entire amount due. That’s what the IRS says to taxpayers who missed the tax deadline. This will minimize penalties and interest charges (the agency charges interest, a failure-to file penalty, and a failure-to-pay penalty if you owe). You may be able to avoid these if the agency accepts your reason for being delinquent.

There’s no penalty if you’re due a refund, but you must file for it within three years. How do you file? You cannot file electronically after the extension deadline in October, either on the IRS servers or through commercial software or websites. You’ll have to file a paper return. You can either send a check along with your return or use the IRS’ online payment options.

What if you can’t pay the total due? The IRS offers options here, including applying online to make installment payments and requesting a temporary delay.

Warning: Remember that the IRS will not send you an email or make a phone call demanding immediate payment. Such a request is part of a phishing scam.

Planning Ahead, Always

How do you keep this from happening again? Our suggestion is that you start doing tax planning year-round. Tax planning should really be a part of your overall financial planning, and it’s something you need to be thinking about all year.

We can help you in several ways here, by:

  • Working with you to understand what you should be doing every month and quarter to increase your understanding of your ongoing income tax obligation.
  • Make recommendations when your company is planning to make large purchases. We can advise you on timing and on how you should be claiming the acquisition on your tax return.
  • Going over your business expenses with you. Do you know what items should be recorded, categorized, and included when you file?
  • Creating reports that will help you calculate your quarterly estimated taxes.
  • Preparing your income taxes when the time comes.

By always considering the tax implications of your income and expenses, you accomplish three things. You make smarter purchases. You’re less likely to get a big, ugly surprise at filing time. And you may well be able to minimize your obligation to the IRS.

Still sitting there with a pile of receipts and forms from an unfiled return? Let us help you get back on track.

Don’t Forget – You are Responsible for Payroll Taxes

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Any business with employees must withhold money from its employees’ paychecks for income and employment taxes, including Social Security and Medicare (FICA) taxes. The business has to forward that money to the government. A business that knowingly or unknowingly fails to remit these withheld  payroll taxes in a timely manner will find itself in trouble with the IRS.

The IRS may levy a penalty, known as the trust fund recovery penalty. The IRS assesses the penalty on individuals classified as “responsible persons.” The amount of the penalty equals to 100% of the unpaid federal income and FICA taxes withheld from employees’ pay.

Who’s a Responsible Person for Payroll Taxes?

Any person who is responsible for collecting, accounting for, and paying over withheld taxes and who willfully fails to remit those taxes to the IRS is a responsible person who can be liable for the trust fund recovery penalty. A company’s officers and employees in charge of accounting functions could fall into this category. However, the IRS will take the facts and circumstances of each individual case into consideration.

The IRS states that a responsible person may be:

  • An officer or an employee of a corporation
  • A member or employee of a partnership
  • A corporate director or shareholder
  • Another person with authority and control over funds to direct their disbursement
  • Another corporation or third party payer
  • Payroll service providers

The IRS will target any person who has significant influence over whether certain bills or creditors should be paid or is responsible for day-to-day financial management.

Working with the IRS

If your responsibilities make you a “responsible person,” then you must make certain that all payroll taxes are being correctly withheld and remitted in a timely manner. Talk to us if you need to know more about the requirements. We can also help you analyze your business’s cash flow so you’ll be in a better position to meet your obligations to the IRS.

Keep Your S Corporation Safe from the IRS

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Like many business owners, you may have structured your business as an S corporation because of the tax benefits it offers. An S corporation provides the same limited liability as a traditional C corporation, but it generally avoids the double taxation associated with a C corporation. You and the other shareholders (if any) pay income taxes on corporate income directly.

Once you have an S election in place, it’s important to make sure you avoid taking any action that would put the election in jeopardy. Your corporation’s failure to meet certain tax law requirements on an ongoing basis could result in the IRS’s termination of its S corporation status.

Ownership

An S corporation generally may not have a corporate shareholder. (Exception: An S corporation may be wholly owned by another S corporation.) All shareholders generally must be individuals, estates, certain trusts, or tax-exempt 501(c)(3) charitable organizations. However, a partnership may hold S corporation stock as a nominee for an eligible shareholder. Nonresident aliens may not be shareholders. A foreigner, non-citizen, resident alien may be an S shareholder, but you need to be careful because there are special qualification requirements, including  requirements regarding physical presence in the United States.

Number of Shareholders

An S corporation may not have more than 100 shareholders. For purposes of this limit, the IRS treats a husband and wife as one shareholder, as it treats certain other related individuals.

S Corporation Stock

An S corporation may have only one class of stock. Generally, a corporation has only one class of stock if all outstanding shares of the corporation’s stock confer identical rights to distribution and liquidation proceeds.

Many small business owners have troubles with this requirement, by not making distributions to owners according to the ownership percentages.

For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.

A S Corporation Loss Equals a Personal Tax Deduction

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Business owners aren’t in business to lose money. So there’s not much to like about a nonprofitable year. For a shareholder in an S corporation, however, a down year can have an upside — the corporate loss may give rise to a personal tax deduction.

S Corporation Basis

Standing between an S shareholder and the loss deduction is a tricky tax computation known as “adjusted basis.” Under the tax law, you have to limit your loss deduction to your adjusted basis in your corporate stock and in any debt the company owes you.

Adjusted basis, essentially, it’s a figure that tracks the shareholder’s investment in the company for tax purposes. The basis number changes every year to account for any money flowing between the company and the shareholder — distributions, capital contributions, loans, and loan repayments — as well as for the shareholder’s allocated share of corporate income or loss. The order in which you increase or decrease the stock basis is very important. You can find out more information about how to calculate the S corporation basis on the IRS website.

S Corporation Loss

If you anticipate an S corporation loss for the year, as an S shareholder you should find out whether you will have enough basis to benefit from the projected loss deduction. If not, it may be possible to increase basis by making a contribution to capital or by loaning the company money before year-end. In the case you have loss and deduction items in excess of stock and/or debt basis you have to suspend them and carry them over to next year. You also need to be mindful that a distribution in excess of stock basis represents a capital gain. When you give us a call today, our tax professionals can offer guidance so that the transaction will pass IRS muster.

Taxable and Non-taxable Income

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To make your income-tax planning more effective, you should have a clear picture of your current tax situation. This means knowing what your taxable income was last year and what it is estimated to be in the following year.

Generally, you are required to report and pay taxes on all income that derives from your labor or capital. This applies to income received in any form (e.g., cash, services, meals, stock, property, etc.). However, certain types of income are tax exempt. The following lists include the most common items in both the taxable and nontaxable categories.

Forms of Taxable Income

  • Wages, salary, fees, tips, commissions, or business profits
  • Gains received from dealings in real estate, securities, and other property
  • Dividends
  • Rents
  • Alimony and separate maintenance payments that the payer can deduct
  • Royalties
  • Income from your share of an estate or trust, aside from gifts or bequests
  • Annuities and pensions
  • Certain fringe benefits
  • Prizes and awards
  • Some legal settlements proceeds
  • Up to 85% of your Social Security benefits, depending on the amount of your other income.
  • Accrued interest earned but not actually received (for example, accrued interest earned on a zero-coupon bond held in a taxable account or accrued interest earned on U.S. Treasury inflation-protected securities (tips))

Forms of Nontaxable Income

  • Interest earned from state, tribal, and municipal bonds and mutual funds that own such bond
  • Gifts and inheritances
  • Expense reimbursements received from your employer
  • Returns of capital such as loan principal repayments and the portion of annuity and pension payments that represent a return of your original investment upon which you have already paid taxes
  • Home sale gains up to $250,000 for single homeowners and $500,000 for married homeowners filing jointly
  • Scholarships, as long as you satisfy some conditions

These lists are not all-inclusive. You can find more information on the IRS website.

Contact us today with any questions.