Ask a CPA

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.

As a CPA, I came across this website and joined just last week, and I just came across your question.

To provide a complete and accurate answer, one would need to know more details about your situation.

First, how many owners have there been for the LLC from 2017 to 2020? Second, if this a situation where the LLC is owned by a married couple? Third, did you ever make any election to determine how the LLC would be taxed for federal income tax purposes? Its classification (disregarded entity, partnership, C corporation, S corporation) for federal income tax purposes would determine whether or not you should have been filing separate federal income tax returns for this LLC.

Besides considering federal income tax returns, you would need to consider state income tax returns or annual reports (depending on the state in which the LLC was created, as you did not provide that detail). It is often the case that returns or reports need to be filed with a state each year, even if it was inactive and even if you are required to file a federal income tax return.

So, yes, there very well could be penalties involved for not filing. However, more needs to be known to make that determination.

Feel free to contact me if you wish to engage me to help you.

Without knowing anything about the type of work involved, it’s a little more difficult to give an answer.

First, presumably, you’re working and being paid as an individual and not working through a company. Second, I assume you’re not going to receive a Form W-2 at year-end from the individual who is paying you. If both of those assumptions are correct, then, you would be considered self-employed. I am not getting into the issue of whether you should be properly classified as an employee or as an independent contractor, as that issue has its own intricacies. By nature of the fact that the person paying you says he/she will not claim any write-off on his/her taxes, it sounds like you’re not being treated as an employee (as treating you as an employee would involve its own paperwork). In that case, you would report any money you received (and any corresponding expenses you pay in order to generate that income) on Schedule C on your individual income tax return, subject to income tax. Also, you should expect any money you receive to be subject to self-employment tax, unless your net earnings from self-employment for the year were less than $400. You do not have to say who paid you. I wish you the best in your endeavors!

As a CPA, I came across this website and joined just last week, and I just came across your question.

First, assuming that you and your husband are each first-time homebuyers, you’re correct that you could use up to $10,000 from your traditional IRA penalty-free for a down payment.

Second, the mechanics of how to do it are a little more involved. If it were possible, I think the best course of action would be to have the bank transfer the money directly to the title company (or whoever is handling closing). This way, you never actually take possession of the money. If that were not possible, I’d have the bank make a check out to payee specified by the title company (or whoever is handling closing). A bank should be willing to at least do that much. If a bank was unwilling to do even that much, I suppose you could resort to taking out the money yourself, but then you leave yourself in a weaker position (from an audit perspective) if you were ever audited. Why put yourself in a position where you have to defend or explain or prove that you used the money correctly when you can avoid the problem altogether?

Third, come tax time next year, the bank should issue a Form 1099-R for the distribution. You’d have to prepare your tax return correctly, to report to the IRS that you qualify for the exception to the 10% early withdrawal penalty because you used the money for a first-time home purchase.

Finally, keep in mind that the $10,000 is a lifetime limit, to be used only one time.

Happy house hunting!

As a CPA, I came across this website and joined just last week, and I just came across your question.

I agree with your attorney wholeheartedly that you should talk with a CPA about your specific circumstances (and the specific circumstances of the other potential LLC member) in order to plan the best way to structure the business for tax purposes. Also, in making that decision, it’s important to consider what you plan to do with the business. Keep in mind that an LLC is a creation or creature of state law. How it is treated for federal income tax purposes is a completely separate matter. Because two of you are involved, you are correct that (for federal income tax purposes), the LLC can be treated as a partnership, C-corporation, or S-corporation. Making the Subchapter S election is how you elect to treat an LLC as an S corporation, so a Subchapter S election is not a fourth type of entity/choice.

In all honesty, the issue of entity election that you are raising is one that is extremely fact-specific, so you really should engage a CPA to listen to your situation and advise you. Feel free to check out my profile on this website as well as Google reviews and please feel free to contact me, if you wish to engage me to help navigate you through the issue at hand.

As a CPA, I came across this website and joined just last week, and I just came across your question.

Unfortunately, no, you will not be able to avoid the tax on capital gains. As you know, as long as you own the stock, you don’t pay any tax on unrealized gains. When you sell stock, you realize gains and pay tax. There is not an exception to that rule, just because you’re using the proceeds to purchase assets for a business.

Trying to think outside the box, even if you could contribute the stock to a business of yours and manage to get tax-free treatment on the contribution of the stock to the business, you’d still run into the same problem when the business tried to sell the stock to get the money to purchase assets. In that case, the business would have to either pay tax itself (at its marginal tax rate) on the capital gains or pass the gains to you and you’d have to pay the tax (depending on how the business was structured for federal income tax purposes).

It’s great that you’re trying to be proactive and find a way to save taxes, but I don’t think it’s a go this time.

Even though you cannot avoid the tax on the capital gains, you should consider depreciation on the assets your purchase for the business. That might help offset some of the tax on your gains. Just a thought.

I wish you the best in your endeavors.

Because DoorDash, GrubHub, and Uber Eats are all online food ordering and delivery platforms, you’re basically doing the same activity, just for different companies. Therefore, IRS will consider them one business. You should file just one (1) Schedule C for all three activities. On the other hand, if you were also doing a completely different activity, such as landscaping, you would need to file two (2) separate Schedules C, one for the online food delivery activity and one for the landscaping work. May you have a successful and safe business!

Congratulations on the sale!

As a CPA, I came across this website and joined just last week, and I just came across your question.

If you just sold an investment property in 2021, the income taxes on the capital gains are due on or by April 15, 2022.

You raise a good question. Without knowing the details of your tax situation, I can say that, in general, it is wise to make an estimated income tax payment using the 2021 Form 1040-ES for the estimated income taxes on the capital gain from the sale of the investment property as soon as possible. Why? To avoid the estimated income tax penalty that could be assessed. If applicable, that’s determined when you prepare your tax return next year. To pay in the next quarter, as you suggest, should be fine.

Also, this is assuming that the sale of the investment property was not structured as an installment sale. Additionally, this assumes that the property in question was always an investment property, never a primary residence or a rental property, so you must take the history of the property into consideration.

If you held the investment property for one year or less, you would pay tax at the same marginal tax bracket as your other ordinary income. On the other hand, if you held the investment property for more than one year, you would pay income tax at the long-term capital gains tax rate (maximum 20%).

Finally, you would need to consider if the 3.8% net investment income tax also applies to your situation.

As a CPA, I came across this website and joined just last week, and I just came across your question.

You use Form 1040-ES to make estimated income tax payments. You can download the form (with instructions on where to mail, etc.) on the website for the Internal Revenue Service (irs.gov). On the home page, click on Search Forms & Instructions. Then, in the Search box, you can type 1040-ES.

Estimated income tax payments are normally due April 15, June 15, September 15, and January 15.

As a CPA, I came across this website and joined just last week, and I just came across your question.

If you received a corrected composite Form 1099 with Line 1a (ordinary dividends) and Line 3 (nondividend distributions) switched, it would definitely make a difference. Why? Because ordinary dividends are income that must be reported, subject to either the long-term capital gains rate applicable to you or the marginal tax rate on ordinary income for you. The extent to which each rate applies to you depends on how much is reported in Line 1b (qualified dividends). So whether line 1a (ordinary dividends) went up or down with the corrected composite Form 1099, it would have an impact on your taxes.

Having said that, I feel that whether or not you should do an amended tax return depends on the amount of the change from the corrected composite Form 1099. If it was material, I would do an amended return. If it was de minimis (very small), I wouldn’t bother. Just know that if you do not amend, you should not be surprised to eventually receive a notice from the Internal Revenue Service, potentially assessing more tax plus some penalty and interest. That’s why I recommend you make your judgment based on the dollar amount involved. If the amount involved is very small, the time (and potential expense to pay someone to amend) doesn’t make sense.

I hope that helps. I wish you the very best!