What to Know About Real Estate Taxes

Investing in rental real estate can be an excellent source of passive income and long-term wealth generation. However, as a responsible real estate investor, it is crucial to be aware of the tax implications associated with rental properties. In this blog post, we will explore the key tax considerations and benefits of owning rental real estate, empowering you to make informed decisions and optimize your tax strategy.

Rental Income and Taxable Deductions:

Rental income received from tenants is considered taxable income. It is important to accurately report rental income on your tax returns, including any payments received in cash or through alternative methods. However, it’s worth noting that you may be eligible to deduct various expenses associated with your rental property, such as mortgage interest, property taxes, insurance, repairs, maintenance, property management fees, and depreciation. These deductions can significantly offset your rental income, reducing your overall tax liability.

Depreciation: A Valuable Tax Benefit

Depreciation is a powerful tax benefit available to rental property owners. The IRS allows you to deduct the cost of the property over its useful life as a non-cash expense. This means you can deduct a portion of the property’s value each year as depreciation, even if the property is appreciating in value. Depreciation not only reduces your taxable rental income but may also be able to generate losses to offset other income, potentially resulting in significant tax savings.

Capital Gains Tax and 1031 Exchanges

When you sell a rental property for a profit, you may be subject to capital gains tax. The capital gains tax rate depends on various factors, such as your income level and how long you held the property. However, there is a valuable tax strategy called a 1031 exchange (also known as a like-kind exchange) that allows you to defer paying capital gains tax by reinvesting the proceeds from the sale into another investment property. This powerful tool can help you grow your real estate portfolio and defer tax payments, potentially maximizing your investment returns.

Passive Activity Losses and Real Estate Professional Status

Rental real estate is generally considered a passive activity for tax purposes. This means that losses generated from rental activities are typically considered passive losses. However, if you qualify as a real estate professional under IRS rules, you may be able to offset other sources of income with your rental real estate losses. To qualify, you must meet specific criteria, including spending a significant amount of time in real estate activities and meeting certain material participation tests. This distinction can have a significant impact on your overall tax situation.

Short-Term Rentals and Airbnb Income

The rise of short-term rental platforms like Airbnb has created new opportunities for real estate investors. It’s essential to understand that income generated from short-term rentals is generally taxable, and you must report it accordingly. Short-term rental income may be considered to be active income for tax purposes rather than passive income. This is because the activity may qualify to be taxed as a trade or business activity. As a result, the income generated from short-term rentals may be subject to self-employment taxes in addition to regular income taxes. However, if a short term rental activity has a loss, then the passive activity loss limitations may not apply.

Conclusion

Owning rental real estate can be a financially rewarding venture, but it comes with important tax considerations. Understanding the tax implications associated with rental properties allows you to optimize your tax strategy, minimize your tax liability, and maximize your return on investment. However, tax laws are complex and subject to change, so it is advisable to consult with a qualified tax professional who specializes in real estate to ensure compliance and make informed decisions based on your unique circumstances. By proactively managing your tax obligations, you can unlock the full potential of your rental real estate investments while staying on the right side of the tax code.

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider
specializing in cloud accounting.

Facebook

Instagram

Twitter

LinkedIn

YouTube

Advertisement

Missed the tax return extension/filing deadline?

Tax season is always a stressful time for many Americans, and this year was no exception. With the constantly changing tax laws, it’s easy to forget or miss important tax deadlines. If you missed the tax return extension deadline, the best recommendation is to file your tax return and pay your tax liability owed as soon as possible.

First, let’s understand what the tax extension deadline is. If you need more time to file your tax return, you can request a tax extension by filing Form 4868. This form gives you an additional six months to file your tax return, moving the deadline from April 18th (for 2023) to October 15th, 2023. However, an extension does not give you more time to pay any taxes you owe. You must still estimate and pay your tax liability by the original due date of April 15th to avoid any penalties and interest charges.

If you missed the extension deadline, the first step is to file your tax return as soon as possible. Even if you cannot pay the full amount owed, filing your return will help you avoid any additional penalties and interest charges. The longer you wait to file, the more you will owe in interest and penalties.

Next, calculate your tax liability owed. If you cannot pay the full amount owed, consider setting up an installment plan with the IRS. An installment plan will allow you to make monthly payments until your tax debt is paid in full. However, keep in mind that interest and penalties will continue to accrue until the debt is paid in full.

It’s important to note that the failure to file penalty is much more severe than the failure to pay penalty. The failure to file penalty is 5% per month of the amount owed, up to a maximum of 25%. The failure to pay penalty is only 0.5% per month of the amount owed. Therefore, it’s crucial to file your tax return even if you cannot pay the full amount owed.

Finally, if you’re struggling to pay your tax debt, seek the help of a tax professional. Depending on your situation, a tax professional can help you negotiate a settlement with the IRS or guide you through the installment plan process. They can also help you determine if you qualify for any tax relief programs.

In conclusion, if you missed the tax return extension deadline, don’t panic. File your tax return as soon as possible, pay your tax liability owed, and consider setting up an installment plan with the IRS. Remember, the longer you wait to file, the more you will owe in interest and penalties. Seek the help of a tax professional if need assistance in preparing, filing, paying tax owed, or if you want to better understand your current standing with the IRS and evaluate whether you qualify for any tax liability relief.

Disclaimer: The information provided above is not meant to
be legal or tax advise. You should consult your CPA and attorney to
determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider
specializing in cloud accounting.

Facebook

Instagram

Twitter

LinkedIn

YouTube

The Tax Season Deadline Is Amongst US

• 

• 

• 

• 

• 

• 

• 

Disclaimer: The information provided above is not meant to
be legal or tax advise. You should consult your CPA and attorney to
determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider
specializing in cloud accounting.

Facebook

Instagram

Twitter

LinkedIn

YouTube

W-2 | Filing Support

It’s that time, April is coming up fast and many people start stressing. Let’s go back to the basics to better understand W-2’s so you don’t have to worry about the word, Deadline.

What is a W2?s

A W-2 is a tax form used in the United States to report an employee’s annual wages and the taxes withheld from those wages. Employers are required to provide their employees with a W-2 form by January 31st each year. The W-2 form includes information such as the employee’s total wages earned during the year, the amount of federal, state, and local income taxes withheld from their paycheck, and the amounts of Social Security and Medicare taxes withheld. Employees use this information to file their federal and state income tax returns.

What if I still don’t have my W-2?

If you do not receive your W-2 form by January 31st, you should first contact your employer to inquire about the status of your W-2. It’s possible that your employer may have sent it to the wrong address or there may be some other delay.

If you still do not receive your W-2 form by mid-February, you should contact the IRS for assistance. You can call the IRS at 1-800-829-1040 and they will contact your employer on your behalf to request a copy of your W-2.

Filing and Extension| Form 4868

Form 4868, also known as the Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, is a tax form used by taxpayers in the United States to request an automatic extension of time to file their federal income tax return.

If you are unable to file your tax return by the April 15th deadline, you can use Form 4868 to request an automatic extension until October 15th. However, it’s important to note that Form 4868 only extends the time to file your tax return, not the time to pay any taxes owed. You must still estimate and pay any taxes owed by the April 15th deadline to avoid penalties and interest charges.

Disclaimer: The information provided above is not meant to
be legal or tax advise. You should consult your CPA and attorney to
determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider
specializing in cloud accounting.

Facebook

Instagram

Twitter

LinkedIn

YouTube

For the Employee – W-4 Forms Explained and Tips on Filling Them Out

Form W-4 – Explained

Form W-4, formally known as “Employee’s Withholding Certificate,” is a form created by the IRS that informs employers how much tax to withhold from each of their employee’s paycheck. This form is used to calculate payroll tax withholdings in order to remit these taxes to the IRS and state (if applicable), on the employee’s behalf.

 

Step 1: Fill out your personal Information

 

Fill out your legal name, address, Social Security number and tax-filing status.

 

Step 2: Accounting for multiple jobs

 

If you or your wife (if you file jointly) is working more than one job or have self-employed income, see below to get accurate withholding:

• The W-4 for the higher paying job, fill out steps 2 to 4(b) of the form and leave those steps blank for the other jobs.
• If you are your spouse both earn the same amount and are married filing jointly, you can check the box associated with Step 2(c) “If there are only two jobs total…”. Please note, however, that both spouses need to fill out their W-4s if you check this box.
• If you are filling out your W-4 and don’t want your employer to know that you have a second job or other income, there are a few options, including:
• On line 4(c), you can instruct your employer to withhold an extra amount of tax from your paycheck; or
• Don’t factor your extra income into your W-4, but instead, send in estimated tax payments to the IRS yourself.

Step 3: Claiming dependents, including children

 

If you have kids and dependents and your total income is under $200,000 ($400,000 married filing jointly), you can enter the number of dependents (including children) and multiply them by the credit amount for the corresponding year. See this overview for the IRS Rules for Claiming a Dependent.

 

Step 4: Personalizing your withholdings

 

If you want to either withhold extra tax because you would rather overpay and receive a refund or you expect to claim deductions other than the dependents in Step 3 and the standard deduction,

 

Step 5: Turn in your W-4

 

Sign and date your W-4 and turn it into your employer’s payroll or human resource team.

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan CPA, PLLC is a cloud based professional services provider specializing in cloud accounting.

Facebook

Instagram

Twitter

LinkedIn

YouTube

Pros and Cons of an S Corporation

What is an S Corporation?

An S Corporation is a type of business structure that combines the benefits of a corporation and a partnership. S Corporations have become popular among small business owners due to the tax and liability advantages they offer. In this blog, we will explore the pros and cons of forming an S Corporation.

An S Corporation is a type of business structure that combines the benefits of a corporation and a partnership. S Corporations have become popular among small business owners due to the tax and liability advantages they offer. In this blog, we will explore the pros and cons of forming an S Corporation.

Pros of an S Corporation:

1. Pass-Through Taxation: One of the biggest advantages of an S Corporation is its pass-through taxation. This means that the company’s income, deductions, and credits are passed through to the shareholders, who then report it on their individual tax returns. This avoids the double taxation that shareholders in C Corporations experience.
2. Limited Liability Protection: Like a corporation, an S Corporation provides limited liability protection to its shareholders, meaning their personal assets are protected in the event of a lawsuit or bankruptcy.
3. Saving SE Taxes: S Corporation tax structure allows an active shareholder to pay themselves a salary for the work they provide. The remainder of the net income from the S Corp allocated to the shareholder avoids self-employment taxes.
4. Cost-Effective: Forming an S Corporation is relatively cost-effective compared to forming a traditional corporation.

Cons of an S Corporation:

1. Complexity: Forming an S Corporation can be complex and time-consuming, requiring legal and tax compliance paperwork. Each year, an 1120S tax return is required to be filed to the IRS which is an additional accounting expense.
2. Restrictions on Shareholders: S Corporations have strict restrictions on shareholders, including a limit on the number of shareholders and the types of shareholders allowed.
3. Limited Deductible Losses: Shareholders of an S Corporation may only deduct losses to the extent of their basis in the company.

In conclusion, an S Corporation offers several benefits, including pass-through taxation, limited liability protection, and saving on self-employment taxes. However, it also has its drawbacks, such as complexity, restrictions on shareholders, and limited deductible losses. Before deciding to form an S Corporation, it’s important to carefully weigh the pros and cons and seek the advice of a tax professional.

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

Facebook

Instagram

Twitter

LinkedIn

YouTube

The Inflation Reduction Act

In August 2022, congress added new tax provisions to the Inflation Reduction Act, that are designed to address health care, fight climate change, and reduce the country’s deficit. These new provisions may affect your personal finances; here is a brief explanation of some of those added provisions:

 

Negotiation of prescription drug prices for Medicare Beneficiaries

The cost for prescription drugs will decrease at the beginning of 2023 due to the tax provision allowing Medicare beneficiaries to negotiate the price of their prescription drugs. It will also include a cap of $2,000 per year in prescription drug costs for beneficiaries each year at the pharmacy and will allow free vaccinations for seniors beginning in 2023.

 

A 15% corporate minimum tax

This provision applies for all large corporations exceeding $1 billion in profits, with some exceptions to private equity firms. The provision will require a new minimum of 15% tax and will apply based on the annual income in the corporation’s financial statement rather than their taxable income. This provision was added due to large corporations paying little to no tax in the previous years.

 

Expansion of IRS agents

The IRS received $80 billion in funding and is expected to hire 87,000 new IRS agents to increase tax collections and tax compliance through more audits.   

 

Clean Energy Credit

This credit incentivizes taxpayers to install solar energy equipment to earn a non-refundable credit equal to 30% of eligible expenses. These expenses include solar panels, heat pumps, inspection and permit costs, batteries, contract labor for on-site preparation and installation, and sales tax. This credit will run until the end of 2032.

 

Electric Vehicle Tax Credit

Taxpayers who purchased a new electric vehicle before January 1, 2023, may be eligible for a tax credit of up to $7,500 and $4,500 for used electric vehicles. The amount of the credit will vary based on the manufacturing location of the vehicle when the car was purchased and placed in service, battery capacity to power, the vehicle, and other factors.

 

The Inflation Reduction Act is designed to grow the economy and reduce the deficit by billions and is projected to fall by more than $1.5 trillion during the year.

 

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

Facebook

Instagram

Twitter

LinkedIn

YouTube

Economic Nexus

In 2018, the Supreme Court overruled the previous ruling that states can only require sellers to collect tax when they have a physical presence in the state. Now, states can require tax collection responsibilities on sellers who have an economic presence without a physical presence.

Many online retailers sell products all over the United States. Out of state sales without a physical presence can still trigger tax obligations in other states. Most states have economic nexus which is a threshold set by the state requiring the out of state seller to collect and remit sales tax. Economic nexus is triggered by reaching a certain amount of sales and/or number of sales transactions in another state.

If you reach any of the nexus thresholds, you must collect and remit sales tax in those states. If you do not reach the nexus threshold, you will collect and remit sales tax in the state your business is located in.

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

Facebook

Instagram

Twitter

LinkedIn

YouTube

Active or Passive? That is the question…

Income falls into three buckets

1. Active Income (wages, business where the taxpayer is materially participating, etc.)
2. Passive Income

There are two kinds of passive activities.

1. Trade or business activities in which you don’t materially participate during the year

2. Rental activities, even if you do materially participate in them, unless you’re a real estate professional

 

3. Portfolio Income (royalties, capital gains, interest, qualified dividends, etc.)

How is Active Income is taxed? Ordinary tax rates plus self employment tax (SS and Medicare tax) of 15.3%.

 

For employees, SS and Medicare is automatically taken out of your paycheck and split 50/50 with employer. For someone who is self employed or active in a business, they must pay both halves of the SS and Medicare, known as self employment tax.

 

How is Passive Income taxed? Ordinary tax rates with no self employment tax. Subject to Net Investment Income Tax (NIIT) of 3.8% if your AGI is above the threshold of $250,000 for MFJ.

 

How is Portfolio Income taxed? Ordinary tax rates or preferential rates for LTCG and qualified dividends.

 

So this might seem that having passive income is better than active income. NOT NECESSARILY.

 

Losses: When you are an owner in a pass through entity (partnership, S Corp), you need to be careful with how you categorize your participation in the business because if the company is generating losses, you may not get to take them.

 

Passive Activity Losses (PALs): When a taxpayer has a loss from a passive activity, it can only offset passive income, NOT active income.

 

Example of passive investor and passive activity loss limitations:

Pete is an individual taxpayer who owns a 25% interest in an LLC. He is categorized as a limited partner and his 25% ownership interest is just an investment as he does not participate in the day-to-day managerial decisions of the business. This means that Pete is a passive partner. The LLC generated a $100,000 loss, $25,000 allocated to Pete on his Schedule K-1. Pete has a full time job where he makes a salary of $100,000.

 

It would appear that Pete can offset his $100,000 income from his W-2 with his $25,000 loss from his Schedule K-1, however, because the loss is passive and the income is active, Pete cannot deduct the $25,000 loss until he has passive income. Therefore, the loss rolls forward until the LLC generates income in a future year, or Pete has passive income from another income stream.

 

How do you qualify as material participation?

1. 1. You participated in the activity for more than 500 hours.
   2. Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity.
   3. You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.
   4. The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you didn’t materially participate under any of the material participation tests, other than this test. See Significant Participation Passive Activities under Recharacterization of Passive Income, later.
   5. You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.
   6. The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital isn’t a material income-producing factor.
   7. Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.

Rental Activities

Rental activities are always passive unless you are a “Real Estate Professional.” There is a special $25,000 allowance for a taxpayer who actively participates in a passive rental real estate activity. So you can deduct up to $25,000 of passive loss against active income if you are deemed to have “actively participated” in the rental real estate activity.

 

 

Active participation- not the same as material participation. Active participation is a less stringent standard than material participation. Examples of active participation (management decisions, approving new tenants, deciding on rental terms, approving expenses, etc.).

 

**So basically any taxpayer can easily qualify as active participation as long as they are making high level decisions for the rental.

 

Real Estate Professional Status

 

You qualified as a real estate professional for the year if you met both of the following requirements.

 

• More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated.
• You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

Facebook

Instagram

Twitter

LinkedIn

YouTube

Accrual vs. Cash Basis

The two primary accounting methods are accrual and cash basis

The main difference between the two methods is the timing of when expenses and revenues are recognized. There are advantages and disadvantages to both methods, so depending on your company’s operations and goals, you can decide which method best aligns with your company’s needs and preferences.

Consult with a Certified Public Accountant or tax professional to ensure the appropriate accounting method is used.

Accrual Accounting

Under this method, revenue is recognized when a sale transaction occurs and expenses are recognized when the purchase of goods or services occur, regardless of whether any cash was received or dispersed.  

The Accrual method is more complex but provides a more accurate picture of a company’s financial position due to its recognition of payables and receivables. However, because some transactions are recorded before cash is actually received, a company’s revenue books will not be aligned with the current amount of cash in their bank account.

The Accrual method is most commonly used by publicly traded companies that are required to receive a financial audit and is accepted under the Generally Accepted Accounting Principles (GAAP).

One example of revenue recognition under the Accrual method: You work for a landscaping company, you mulched a lawn for a client and you invoice the client $200 on December 31. You will recognize revenue on December 31 because the service was performed that day, regardless of whether you received a form of payment from the client.

Cash Accounting

This method is known for its simplicity of keeping track of cash flow because revenue and expenses are accounted for only when cash is received or dispersed.

The Cash method gives you an accurate picture of the cash in your bank account today but does not account for payables or receivables; therefore, the risk of overstating the health of a company is present and does not provide an accurate representation of a company’s financial position. Typically, this method is most used for small businesses and sole proprietorships.

The Cash method is not acceptable under the Generally Accepted Accounting Principles (GAAP).

One example of a revenue recognition under the Cash method: Let’s use the same example from above. You work for a landscaping company, you mulched a lawn for a client, and you invoice the client $200 on December 31. You do not recognize revenue on December 31, because you have not received any form of payment. You will record revenue on the day you receive cash, a check, or a credit card payment from the client for your mulching services.

Why is it important to choose the correct accounting method?

• It is useful to track your cash flow and understand the future of your company’s financial position
• It is important for tax purposes in order to determine the accurate amount of annual taxes you will need to pay to the Internal Revenue Service (IRS)
• It is important to ensure compliance of state and federal regulations. Some states have a preferred accounting method to be used by businesses

Can a company change its method of accounting?

Yes, but a tax return must be filed and approved by the Internal Revenue Service (IRS) before changing its accounting method. To make this legal change, Form 3115, Application for Change in Accounting Method, must be filed by the taxpayer.

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

Facebook

Instagram

Twitter

LinkedIn

YouTube