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Answer Tax Questions

Deductions and Write-Offs

Business Expense from Refund of Previous Year

Asked Thursday, July 08, 2021 by Mark B.

Yes and no.

Technically, I would code it to a contra-revenue account, something like Sales Returns and Allowances (that would be a general ledger account for a business that sells products). So you would debit or increase that account on the income statement and credit or decrease your bank balance on the balance sheet.

The effect would be that it would lower your profit (bottom line). So in that sense, it’s like a business expense, but it’s not actually an expense, it’s a reduction to overall revenue.

Answer Provided by: personimage Adam Dickreiter

Personal Taxes

Gift taxes

Asked Wednesday, July 07, 2021 by Jacqueline D.

Seeing that there was no paperwork to document the loan, I assume no interest was ever paid. While the intention may have been for it to be treated as a loan, neither party behaved like it was a loan (by having a written promissory note, periodic payments, interest to be paid, etc.).

If your father every got audited and this issue arose in audit, he would first have to prove that the receipt of the $30,000 was not income to him. Again, it’s difficult for your father to assert it was a loan when it was never treated as such. Assuming that you could prove it was not income, then the IRS might argue that it was a loan (if that was in the IRS’ best interest). If the IRS could win on that front, they’d go after your father’s friend for imputed interest income, as you can’t have a loan with no interest. However, if it ended up being treated as a gift, I recommend the following.

To keep things simple, your father should repay the $30,000 in two pieces, making sure not to exceed the annual exclusion (presently $15,000) by giving no more than $15,000 each calendar year. So it would take two payments – one for $15,000 this year (2021) and the second for $15,000 next year (2022). By doing it this way, your father would not need to file a gift tax return for the total transfer of $30,000 back to his friend. Also, your father would not need to pay any tax.

To summarize, I would assume it was a gift all along and take the aforementioned steps to do damage control. Of course, it would have been better to simply have done things right from the beginning, rather than try to find a legal way out of the mess later.

Answer Provided by: personimage Adam Dickreiter

Business Formation

PLLC or LLC for Physical Therapy in WA

Asked Sunday, July 04, 2021 by Gina B.

First, congratulations on your decision to form your own practice!

To answer your question, I will make a few comments.

First, a PLLC and an LLC are both creatures (creations) of state law. I practice as a CPA in Texas, so I cannot speak to Washington state law. From my experience in Texas, if you have a license (such as a CPA license), you are required to form a PLLC instead of an LLC (if you choose to operate through a limited liability company).

Second, from a federal income tax perspective, there is no difference in federal income tax treatment between a PLLC and an LLC. Why? Because for federal income tax purposes, there are generally only four (4) ways to get taxed – as a disregarded entity, partnership, C corporation, or S corporation. If you will be the sole owner of the company, your choices are really disregarded entity, C corporation, or S corporation. You can’t have a partnership with just one partner.

Third, I think you’re asking which is better (a PLLC or an LLC) in terms of federal income tax treatment. If that is your question, then they are treated the same. Again, the actual federal income tax treatment depends on how to choose to treat it – going back to the four choices I listed above. So the treatment doesn’t depend on whether it’s a PLLC or LLC.

I hope that answers your question. Feel free to contact me if you wish to engage me to help.

Answer Provided by: personimage Adam Dickreiter

Personal Taxes

Wage and Income Transcript

Asked Saturday, July 03, 2021 by John D.

I don’t think this is a reason to panic. On the other hand, I do think this is a reason to take proactive steps, which you have already been doing.

If you have not already done so, I recommend you prepare and file your return showing just the one Form W-2. You should not show the duplicate Form W-2. Hopefully, you’ve been documenting (writing down dates, times, names, phone numbers called, etc.) for all your contacts (with your employer, Social Security Administration, and Internal Revenue Service). Because you’re in a panic and quite motivated now (and the details are fresh in your mind), you should compose a letter to the Internal Revenue Service right now, to explain why you reported just one Form W-2 and to document all your efforts (even though unfruitful) to make things right.

Once you file your return, the Internal Revenue Service will process it. You can expect that they will send you a notice for what they perceive is unreported income. Don’t be surprised if they also assess penalties and interest. However, if you write your letter now, you will have most of the details on hand for when you get the IRS notice. Then, you’ll just need to tweak your letter to directly address the points raised in the IRS notice. If you choose, you could even include a copy of your letter when you file the return (if you paper file it). However, I don’t recommend it. The letter will probably be ignored. Also, if you paper file, the processing of the return will definitely be delayed.

So, I wouldn’t panic. You haven’t done anything wrong. Unfortunately, know that you have a long road ahead of you. There is light at the end of the tunnel, but it’s a long tunnel ahead of you.

Answer Provided by: personimage Adam Dickreiter

Business Formation

EIN question

Asked Friday, July 02, 2021 by Daniel G.

Daniel, good question. To answer your question, I will make two comments.

First, because your son is underage, you should put just your information as the responsible party on the Form SS-4 (Application for Employer Identification Number) or its online equivalent on the IRS’ website.

Second, I think your question reveals some confusion. On the Form SS-4 (or its online equivalent on the IRS’ website), you should indicate that there will be two LLC members (you and your son). After filing the Form SS-4, if you take no further action to elect to treat the LLC differently for federal income tax purposes, then the LLC will be treated as a partnership for federal income tax purposes (because you told the IRS on the Form SS-4 or its equivalent that there will be 2 LLC members). If you want to treat the LLC as something other than a partnership (such as a C corporation or an S corporation), you cannot accomplish that goal just by filing the Form SS-4 or its equivalent. That would take a second step with a different form.

I hope that helps. Feel free to contact me if you wish to engage me to help. Even though I practice as a CPA in Texas, I have clients in other states.

Answer Provided by: personimage Adam Dickreiter

Personal Taxes

Avoiding Capital Gains Tax for selling my home in under a year of buying

Asked Thursday, July 01, 2021 by Philip R.

Good question. It sounds like you already have a buyer and sales price in mind, so it sounds like a like-kind exchange isn’t an option for you.

You are right that a sale after only 9 months would force short-term capital gains tax on you. However, I you could hold the property for more than one year, you would get long-term capital gain tax treatment. Perhaps you could work out a deal with the buyer to rent it to him/her long enough to get you well over the one year holding period. Perhaps you could come to an agreement that would be beneficial for both of you.

Feel free to contact me if you wish to engage me to help. Even though I practice as a CPA in Texas, I have clients in other states.

Answer Provided by: personimage Adam Dickreiter

Payments and Penalties

Can i pay unequal quarterly payments?

Asked Thursday, July 01, 2021 by Justin S.

First, congratulations on being a first-time LLC owner!

To answer your question, yes, you can pay tax on the net profit each quarter via Form 1040-ES instead of trying to estimate what your profit will be for the entire year. Your approach is perfectly reasonable and acceptable. To answer your other question, you can pay unequal quarterly payments for estimated income taxes.

Feel free to contact me if you wish to engage me to help with anything. Even though I practice as a CPA in Texas, I have clients in other states, as I do multi-state returns.

Answer Provided by: personimage Adam Dickreiter

Business Formation

LLC partnership

Asked Wednesday, June 30, 2021 by James B.

If we are going to use exact terminology, an LLC taxed for federal income tax purposes cannot have “retained earnings.” Retained earnings is a term used in the context of a C corporation or S corporation.

You are correct that an LLC is a pass-through entity (assuming that it’s taxed for federal income tax purposes as a disregarded entity, partnership, or S corporation). If the LLC is taxed for federal income tax purposes as a pass-through entity, then, yes, owners will pay tax on their percentage, regardless of whether it’s reinvested, left untouched in members’ capital, or distributed to owners.

Feel free to contact me if you wish to engage me to help with anything. Even though I practice as a CPA in Texas, I have clients in other states, as I do multi-state returns.

Answer Provided by: personimage Adam Dickreiter

Family Issues

Does money transferred from an account under my parent's name count as income?

Asked Tuesday, June 29, 2021 by Matthew H.

Good question.

First, to make sure I understand the facts, I’ll summarize the background. You’re saying that as a minor, you earned money in the past. Because you were a minor, your mother set up multiple bank accounts (in your name – not hers) at her bank and deposited your earnings in those accounts. Presumably, if there were any taxes to file and pay on your earnings, that was addressed annually, along the way. Now, you are an adult and wish to transfer money to a new bank account.

Based on the facts you stated, the money being transferred to a new bank account would not count as income. I imagine that you should have no trouble getting access to the funds in the old bank to transfer to the new bank because the multiple accounts at the old bank are all titled in your name. Even if it was the case that your mother was a joint owner on those accounts, you’d still full access because each of you is a joint owner (in my hypothetical).

Keep in mind, your fact pattern doesn’t specify what type of account is involved, so I assuming they’re just plain bank accounts, such as checking, savings, money market, or certificates of deposit. Depending on the type of account involved (such as a traditional IRA or Roth IRA), they answer might change.

I hope that helps.

Answer Provided by: personimage Adam Dickreiter

Miscellaneous

Income, Taxes and Business Entities

Asked Tuesday, June 29, 2021 by Alisia R.

I can tell you put some thought into your questions. First, congratulations on the freelance work.

To set aside money for taxes on any profit, you are right that it is a good idea to have a separate account for the taxes. Keep in mind that you need to be very careful to keep your business separate from your personal life. Therefore, you shouldn’t be paying business expenses out of a personal account or depositing business income directly into a personal account. That’s called commingling. If you commingle accounts and you ever got audited by the IRS, you’d have a nightmare on your hands because an IRS agent could subpoena ALL your bank accounts and assert that any deposits to ALL bank accounts (even personal accounts) is income, subject to tax. Then, the burden of proof would shift to you. Why go through all that torture? So do it the right way from the beginning.

Consider your freelance work a business, even if it’s conducted as merely a sole proprietorship without a dba (assumed name). Each business should have its own bank account, separate from any personal account and separate from the bank account for any other business you own. That is, each different type of business must be treated separately. To illustrate, if you had one business where you did consulting and a second business where you did dog grooming, each of those businesses should have its own bank account. Why? Because on your tax return, you’re required to separately report each activity/business. So you’d have personal accounts, at least 1 business account for each activity/business, and then yet another account to set aside money for taxes. I don’t think it matters whether that “tax” account was a checking or a savings account.

If you take the business to the next level, I would recommend an LLC in the beginning. An LLC will give you (as an individual) some legal liability protection, by separating the business from you personally. If the business got to a certain level of profitability, making an S election would be wise. A C corporation might also be a good option; it depends on your specific situation. I don’t counsel my clients to do a C corporation or S corporation on day one because those entities require you to file separate federal business tax returns, which means having to pay someone (like me) to do the tax returns. It doesn’t make sense to incur those additional compliance costs if you’re not making a profit.

You are right that taxes vary from location to location. That is, state and local taxes differ. Federal taxes are the same, regardless of where you live in the 50 states. Being in New York, you’re definitely subject to state income tax.

Feel free to contact me, if you wish to engage me for assistance.

Answer Provided by: personimage Adam Dickreiter