Ronald J. Cappuccio, J.D., LL.M. (Tax)Ronald J. Cappuccio, J.D., LL.M. (Tax)2024-03-09T21:59:14Zhttps://www.taxesq.com/feed/atom/WordPress/wp-content/uploads/sites/1602551/2021/05/cropped-Site_Icon_RJC-e1621393214467-2-32x32.pngby roncappucciohttps://www.taxesq.com/?p=2549772024-03-09T21:59:14Z2024-03-09T21:46:52ZIRS Targets High-Income Non-FilersThe Internal Revenue Service (IRS) is shifting gears as it targets thousands of high-income Americans who have not filed their tax returns for several years. This is part of a broader effort to enforce tax compliance and accountability among individuals earning $400,000 or more annually.
IRS Sends 125,000 Notices
The IRS is set to send 125,000 notices to high-income earners who have failed to file their tax returns in at least one year since 2017. However, note that the number of non-filers might be less than this figure, as many of these individuals have not filed in multiple years.
Retain a Tax Attorney to fight this.
The IRS strongly advises non-filers to consult with a Tax Lawyer to preserve Attorney-Client Confidentiality. The Tax Lawyer can engage an accountant to prepare and file their returns immediately to avoid higher penalties and stronger enforcement measures, including possible criminal penalties and jail. These measures could include audit action, collection, and even potential criminal prosecution.IRS trying to collect Billions in TaxesThe amount of unpaid taxes was not specified in the announcement. The IRS believes these non-filing high-income earners may owe hundreds of millions of dollars in unpaid taxes. However, this estimate does not consider any potential credits or deductions that these non-filers may have.In summary, the IRS is taking decisive action against high-income non-filers. This enforcement effort emphasizes the importance of tax compliance and the potential ramifications of failing to file tax returns.
RJC]]>by roncappucciohttps://www.taxesq.com/?p=2549762024-02-26T16:32:45Z2024-02-26T16:32:45ZTax-wise ways to take cash from your corporation while avoiding dividend treatment
If you want to withdraw cash from your closely held corporation at a low tax cost, the easiest way is to distribute cash as a dividend. However, a dividend distribution isn’t tax efficient since it’s taxable to you to the extent of your corporation’s “earnings and profits,” but it’s not deductible by the corporation.
5 different approaches
Thankfully, there are some alternative methods that may allow you to withdraw cash from a corporation while avoiding dividend treatment. Here are five possible options:
Salary. Reasonable compensation that you or your family members receive for services rendered to the corporation is deductible by the business. However, it’s also taxable to the recipient(s). The same rule applies to any compensation (in the form of rent) that you receive from the corporation for the use of property. In either case, the amount of compensation must be reasonable in relation to the services rendered or the value of the property provided. If it’s excessive, the excess will be nondeductible and treated as a corporate distribution.
Fringe benefits. Consider obtaining the equivalent of a cash withdrawal in fringe benefits that are deductible by the corporation and not taxable to you. Examples are life insurance, certain medical benefits, disability insurance and dependent care. Most of these benefits are tax-free only if provided on a nondiscriminatory basis to other employees of the corporation. You can also establish a salary reduction plan that allows you (and other employees) to take a portion of your compensation as nontaxable benefits, rather than as taxable compensation.
Capital repayments. To the extent that you’ve capitalized the corporation with debt, including amounts that you’ve advanced to the business, the corporation can repay the debt without the repayment being treated as a dividend. Additionally, interest paid on the debt can be deducted by the corporation. This assumes that the debt has been properly documented with terms that characterize debt and that the corporation doesn’t have an excessively high debt-to-equity ratio. If not, the “debt” repayment may be taxed as a dividend. If you make cash contributions to the corporation in the future, consider structuring them as debt to facilitate later withdrawals on a tax-advantaged basis.
Loans. You may withdraw cash from the corporation tax-free by borrowing money from it. However, to avoid having the loan characterized as a corporate distribution, it should be properly documented in a loan agreement or a note and be made on terms that are comparable to those on which an unrelated third party would lend money to you. This should include a provision for interest and principal. All interest and principal payments should be made when required under the loan terms. Also, consider the effect of the corporation’s receipt of interest income.
Property sales. You can withdraw cash from the corporation by selling property to it. However, certain sales should be avoided. For example, you shouldn’t sell property to a more than 50% owned corporation at a loss, since the loss will be disallowed. And you shouldn’t sell depreciable property to a more than 50% owned corporation at a gain, since the gain will be treated as ordinary income, rather than capital gain. A sale should be on terms that are comparable to those on which an unrelated third party would purchase the property. You may need to obtain an independent appraisal to establish the property’s value.
Minimize taxes
If you’re interested in discussing any of these ideas, contact us. We can help you get the maximum out of your corporation at the minimum tax cost. Please call me at 856-665-2121.
RJC]]>by roncappucciohttps://www.taxesq.com/?p=2549752024-02-22T02:37:39Z2024-02-22T02:37:39ZAre you taking your spouse on a business trip? Can you write off the costs?Post-pandemic global business travel is projected to reach $928.4 billion by 2030, following a reported market value of $665.3 billion in 2022. Business owners who travel may have questions about deducting the expenses of bringing their spouse along on trips.
Is your spouse an employee?
Deducting a spouse's travel costs is restricted to cases where they are employees, and their presence serves a bona fide business purpose. Merely performing incidental tasks or participating in social functions is usually not enough. However, it may qualify if their presence is necessary for medical care.If your spouse's travel meets the requirements, the usual deductions for business travel can be claimed, covering transportation, meals, lodging, and incidental costs.
What if your spouse isn’t an employee?
Your spouse's travel may not meet the qualification requirements for a tax deduction. However, you can still deduct a significant portion of the trip's cost. You are only required to allocate additional expenses incurred for your spouse, such as hotel single-room rates. If traveling alone, you can deduct the cost of a single room even if your spouse joins. Public transportation and meal expenses incurred by your spouse are not deductible.
Have questions?
You want to maximize all the tax breaks you can claim for your small business. Contact me at 856-665-2121 if you have questions or need assistance with this or other tax-related issues.-RJC
]]>by roncappucciohttps://www.taxesq.com/?p=2549742024-02-05T16:27:23Z2024-02-05T16:27:23ZNine tax considerations if you’re starting a business as a sole proprietorWhen launching a small business, many entrepreneurs start as sole proprietors. If you’re launching a venture as a sole proprietorship, you need to understand the tax issues involved. Here are nine considerations:1. You may qualify for the pass-through deduction. To the extent your business generates qualified business income, you can claim the 20% pass-through deduction, subject to limitations. The deduction is taken “below the line,” meaning it reduces taxable income rather than being taken “above the line” against your gross income. However, you can take the deduction even if you don’t itemize deductions and instead claim the standard deduction. This deduction is only available through 2025 unless Congress acts to extend it.2. You report income and expenses on Schedule C of Form 1040. The net income will be taxable regardless of whether you withdraw cash from the business. Your business expenses are deductible against gross income and not as itemized deductions. If you have losses, they’ll generally be deductible against your other income. They are subject to special rules related to hobby losses, passive activity losses, and losses from activities in which you weren’t “at risk.”3. You must pay self-employment taxes. For 2024, you pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your net earnings from self-employment up to $168,600 and Medicare tax only at a 2.9% rate on the excess. An additional 0.9% Medicare tax (for a total of 3.8%) is imposed on self-employment income of more than $250,000 for joint returns, $125,000 for married taxpayers filing separate returns, and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax. Still, you can deduct half of your self-employment tax as an adjustment to income.4. You generally must make quarterly estimated tax payments. For 2024, these are due April 15, June 17, September 16, and January 15, 2025.5. You can deduct 100% of your health insurance costs as a business expense. This means your deduction for medical care insurance won’t be subject to the rule that limits medical expense deductions.6. You may be able to deduct home office expenses. If you work from a home office, perform management or administrative tasks there, or store product samples or inventory at home, you may be entitled to deduct an allocable part of certain expenses, including mortgage interest or rent, insurance, utilities, repairs, maintenance, and depreciation. You can also deduct travel expenses from a home office to another work location.7. You should keep complete records of your income and expenses. Specifically, you should carefully record your expenses to claim all the tax breaks you’re entitled to. Certain expenses, such as automobile, travel, meals, and home office expenses, require extra attention because they’re subject to special recordkeeping rules or deductibility limits.8. You have more responsibilities if you hire employees. For example, you must get a taxpayer identification number and withhold and pay over payroll taxes.9. You should consider establishing a qualified retirement plan. The advantages are that amounts contributed to it are deductible at the time of the contributions and aren’t taken into income until they’re withdrawn. You might consider a SEP plan, which requires minimal paperwork. A SIMPLE plan is also available to sole proprietors and offers tax advantages with fewer restrictions and administrative requirements. If you don’t establish a retirement plan, you may still be able to contribute to an IRA.If you have any questions about this, please do not hesitate to call me at 856-665-2121RJC
]]>by roncappucciohttps://www.taxesq.com/?p=2549732024-02-02T15:14:18Z2024-02-02T15:14:18ZIf you "think" about doing business with anyone in New Jersey, the State is coming after you!
New Jersey recently adopted the 200-transactions economic nexus standard for corporate income tax purposes. For tax years ending from July 31, 2023, NJ will now claim nexus against an out-of-state corporation:a) if the corporation derives receipts exceeding $100,000 from sources in New Jersey during the fiscal or calendar year; or b) the corporation has 200 or more transactions delivered to NJ customers during the calendar or fiscal year.For service transactions, “delivered to a customer” for nexus purposes means the location where the benefit of the service is received. If the service is received in NJ that creates nexus.Note: A New Jersey Division of Taxation Technical Bulletin establishes that a corporation that meets the economic nexus threshold but whose activities are protected by Public Law 86-272 The Federal Interstate Income Act* will be liable only for the minimum tax.For tax periods ending on or after July 31, 2023, the Division’s guidance indicates that it does not consider the Interstate Income Act to protect various online business activities. In targeting these remote electronic activities, the Division specifies that unprotected activities include offering, soliciting, selling, accepting, or buying digital assets, such as cryptocurrency and non-fungible tokens (NFTs), or offering services related to those assets, and selling targeted internet advertising services that rely on data mined from software or ancillary data, such as apps or cookies, placed on devices in New Jersey.
You may be headed to NJ Tax COurt to fight the New Jersey Division of Taxation
A December 2023 order of the New Jersey Tax Court serves as an affirmation that nexus continues to be both a distinct inquiry from Interstate Income Act protection and the preliminary and paramount consideration, but also that nexus remains a highly fact-specific question that can spark protracted (and potentially costly) disputes.The case involved a freight forwarder that provided less-than-truckload (LTL) services to customers in New Jersey by coordinating with its customers remotely and arranging pick-up of the customers’ temperature-controlled LTL shipments by independently owned trucking companies or carriers. The third-party trucking companies transported the shipments to the taxpayer’s consolidation centers in one of seven states (other than New Jersey) for redistribution by the taxpayer’s employees. Then, they collected the shipments for delivery to the taxpayer’s customers, some of whom were in New Jersey.The court declined to issue a summary judgment in favor of the taxpayer or the Division, finding that the freight forwarder was engaged in activities exceeding the protection of Interstate Income Act in New Jersey but that the record did not establish whether the freight forwarder had nexus with the state. The court found that the taxpayer’s performing services for its customers did not constitute an activity protected by Interstate Income Act , which, by its plain language, protects only solicitation related to sales of tangible personal property. Resolving the nexus question, however, would involve delving into factual details beyond the record before the court. While the Division highlighted that the taxpayer identified approximately 238 customers having a domicile in New Jersey, for the tax years at issue, the Division identified only one New Jersey domiciled customer, with shipments totaling approximately $130,000, or an average of $18,571 per year, which the taxpayer asserted were de minimis activities, revenue, and contacts with the state.Observing that one of the central inquiries to be made by the court in discerning whether a taxpayer is exercising its corporate franchise in New Jersey is whether the taxpayer “engages in contacts within New Jersey,” the court noted that although the record revealed that the taxpayer had serviced more than 200 customers in New Jersey, the record failed to disclose how many of those customers placed freight shipment consolidation orders with the taxpayer during the tax years at issue. Questions concerning receipts or a possible agency relationship between the taxpayer and trucking companies were also incapable of resolution based on the record before the court, which found that it did not “possess a clear picture of the scope, nature, and extent” of the taxpayer’s or the taxpayer’s employees’ in-state business activities. With genuine issues of material fact remaining unresolved, the court denied the taxpayer’s motion for summary judgment and the Division’s cross-motion for summary judgment. Barring a settlement, the matter will proceed to trial.
Nexus is the State's new way of collecting more taxes from out-of-state businesses!
Nexus is the hot issue is State taxation. The claim of Nexus can result in not only Sales and Use Tax obligation, but also corporate and personal income tax filings and payment. If this is an issue, please call me at 856-665-2121 BEFORE you speak to anyone!RJC*Title 15 USCA Section 381, “Public Law 86-272,” prohibits a state from imposing a net income-based tax on the income of a foreign corporation earned within 1 Rev. 9/23 its borders from interstate commerce, if the corporation’s only business activity within the state consists of the solicitation of orders by the corporation or its representatives of tangible personal property, the orders are sent outside the state for approval and, if approved, are filled by shipment or delivery from a point outside the state.]]>by roncappucciohttps://www.taxesq.com/?p=2549722024-01-22T02:58:27Z2024-01-22T02:58:27ZReimbursements for Job-Related Qualified Education ExpensesAn employer can give employees unlimited tax-free reimbursements to cover qualified education expenses. In a nutshell, qualified education expenses are for education that:If required by the employer or by law or regulation to retain an employee's current job orMaintains or improves skills needed for an employee's current job.The company can also directly pay qualified education expenses on an employee's behalf with the same favorable tax treatment. Such reimbursements or payments are tax-deductible and not subject to federal payroll taxes. Note: Qualified education expenses don't include education costs that qualify an employee for a new occupation or profession. Suppose an employer pays for that kind of education. In that case, the payments count as additional taxable compensation for the employee, subject to income and payroll taxes — unless they're run through a Section 127 educational assistance plan.Educational Assistance PlansAn employer can offer a Sec. 127 educational assistance program that gives each participating employee up to $5,250 in annual tax-free reimbursements. The employer can deduct the costs of operating a Sec. 127 plan as a business expense without owing any federal payroll taxes.The tax rules permit these plans to cover just about anything that constitutes education, including graduate coursework, whether job-related or not. There are only two tax-law restrictions:1.The education must be for the employee rather than another member of the employee's family; and
2. The plan can't pay for courses involving sports, games, or hobbies unless they relate to company business.Plans may reimburse employees only for education that's job-related. What's reimbursable is left to the employer's discretion when setting up the plan.As a bonus, Congress enacted legislation in 2020 that allows federal-income-tax-free treatment for payments made by employer-sponsored Sec. 127 educational assistance plans toward student loan debts of participating employees. This deal covers payments made under Sec. 127 plans through December 31, 2025. The annual limit is $5,250 for any combination of education expenses and student loan payments.RJC
]]>by roncappucciohttps://www.taxesq.com/?p=2549672024-01-04T16:15:37Z2024-01-04T16:15:37ZA business owner goes to jail trying to hide income using a check cashing agency.
There is a mistaken and absolutely crazy beliefusing a check cashing agency will enable a business to hide gross receipts from the IRS. Not true!The IRS frequently audits check-cashing agencies and reviews the checks cashed for their clients. They also get bank records and other documents from the check-cashing agency to find businesses using their services. Then, the IRS audits and checks the firms to ensure that customers' income is reported as gross income. If not, they attack the business owner with criminal and civil tax fraud.Joaquin Sosa, of New Bedford, Massachusetts, was sentenced to 18 months in prison for evading taxes on income he earned as a commercial fisherman. Despite receiving approximately $1.9 million in income between 2012 and 2021, Sosa did not file tax returnsreporting the income or pay the income taxes owed on that income. To conceal the source and disposition of his income, Sosa cashed his paychecks from fishing companies at check-cashing businesses, sometimes using false identities, and used the cash to fund his lifestyle. Sosa caused a "tax loss" to the IRS of $520,415.
If you know a business owner who tries to conceal income by using a check-cashing agency, please have them call me at 856-665-2121. They must only speak to a lawyer, not an accountant or tax preparer, to have attorney-client confidentiality.
RJC]]>by roncappucciohttps://www.taxesq.com/?p=2549662023-12-29T19:33:49Z2023-12-29T19:33:49Z1. Unemployment Benefits
Signing up for unemployment benefits immediately after you're laid off is essential. To be eligible to receive unemployment benefits under state law, you must:
• Have not voluntarily departed the job without good cause (as defined by state law),
• Have been employed for a specific time,
• Have earned a minimum amount of wages before becoming unemployed,
• Remain available for work immediately, and
• Be physically able to work.
If you're eligible for unemployment benefits, your first payment will generally be made a few weeks after your claim is completed and processed. The benefits vary from state to state. Some states are more generous than others.
Unemployment benefits are fully taxable. (For 2020, a COVID-relief law temporarily excluded from tax the first $10,200 of unemployment benefits for those with a household income under $150,000. But this tax break is no longer available.)
2. Severance Pay
Companies often pay severance to employees when they implement layoffs or terminations. Generally, it's based on your wages and the time you worked for the company. Absent contractual obligations, employers are under no legal obligation to provide severance. But many do so voluntarily.
Severance pay and any accrued vacation and sick time payments are taxable in the year they are received. The tax payment process can be simplified if the appropriate amount of federal and state taxes is withheld at payment time. Also, be aware that severance pay is subject to payroll and income taxes.
There's an important exception: If you benefit from job placement services from an employer as part of a severance package, the value of those services is tax-free.
3. Health Insurance
Suppose you work for an employer with 20 or more employees in the prior year. In that case, the Consolidated Omnibus Budget Reconciliation Act (COBRA) requires the employer to offer to continue health insurance coverage to departing employees for a specified time (typically, 18 or 36 months). This benefit is tax-free, but employees must pay the (generally costly) premiums. In some situations, a 2% administrative fee also may be charged.
Alternatively, you can obtain and pay for health insurance on your own. In that case, you can deduct the cost of health insurance as a medical expense subject to an annual floor. The deduction is currently limited to the excess of qualified expenses, including unreimbursed health insurance, above 7.5% of your adjusted gross income (AGI). Plus, you must itemize deductions to receive any tax benefit.
Important: Married people who lose their jobs may be able to obtain health care benefits through their spouses if the spouse is employed and their plan allows a change before the annual enrollment period. If you're eligible for this option, employer coverage is generally tax-free. At the same time, unreimbursed payments count toward the medical expense deduction.
4. Retirement Plans
When you "separate from service," you're entitled to the vested benefits in your 401(k) or other qualified employer retirement plan. In this situation, you have several options, including the following:
A. Cash out. You can take a lump-sum distribution or a partial distribution of funds. The payout amount is taxed at ordinary income rates, which may be as high as 37%. And you'll owe a 10% penalty tax on the taxable portion of the distribution if you're under age 59½ unless an exception applies.
B. Roll over to an IRA. If you don't need the money immediately, you can roll over funds in your account to an IRA. If you roll over a distribution within 60 days, you won't owe any tax or penalties. But 20% withholding is mandatory on distributions. A more prudent approach might be to use a direct "trustee-to-trustee transfer" where you never touch the money. This transfer is exempt from tax, and there's no withholding requirement.
C. Roll over to a new employer's plan. Suppose you get another job soon after the layoff, and your new employer has a 401(k) or other qualified plan. In that case, you can roll over the funds to the new employer's plan without any tax liability. The same basic rollover rules generally apply, so you have 60 days to complete the transfer. But, if you miss this deadline, the distribution will be fully taxable.
D. Leave the money where it is. If your old plan permits it, you can keep the money in your account with your former employer, which can continue to compound on a tax-deferred basis. Of course, you no longer work for the employer, so you may be disadvantaged if you do this.
5. Side Hustles
You can make ends meet until you get another full-time job. The "gig economy" provides plenty of opportunities, such as driving for Uber, offering consulting services, or working for DoorDash. Naturally, this results in inevitable tax consequences.
For starters, the income you earn from a gig is taxable. Generally, you're classified as an independent contractor rather than an employee, so you must report your income from the activities annually on your tax return. You're also subject to self-employment tax. Self-employed individuals need to make quarterly tax estimates to avoid under-withholding penalties.
On the plus side, you can deduct "ordinary and necessary" business expenses that may offset some of your taxable income. The deductions are claimed on Schedule C when you file your tax return for the year. You must keep records of potential business expenses shuch as:
• Cell Phone
• Internet
• Vehicle Expenses (Mileage Log is Necessary!)
• Advertising, Social Media Websites
• Meals
6. Job-Hunting Expenses
Previously, you could deduct job-hunting expenses as miscellaneous expenses if you itemized, subject to a floor of 2% of AGI for all your miscellaneous expenses. However, the Tax Cuts and Jobs Act suspended deductions for miscellaneous expenses for 2018 through 2025.
For More Information
This is only a brief overview of several potential tax complications relating to layoffs. If you have any further questions, contact me at 856-665-2121.
RJC]]>by roncappucciohttps://www.taxesq.com/?p=2549652023-12-07T21:57:07Z2023-12-07T21:44:50Zby roncappucciohttps://www.taxesq.com/?p=2549642023-11-25T02:08:49Z2023-11-25T02:07:40ZIs a Franchise a good option for establishing a business?When considering going into business for yourself, you have three basic choices: start from scratch, buy an existing business, or look for opportunities as a franchise.
A franchise allows you to use a service mark, trademark, or business concept. Each franchisee signs an agreement that governs how the business is operated. This ensures a uniform standard of quality throughout the system.
More than 2,700 franchise businesses exist in the U.S., covering every conceivable industry, from well-known brands like McDonald's to smaller local opportunities. So, there's plenty of opportunity if you choose the franchise route. The challenge is to find one that's interesting and a good investment.Purchasing a franchise business is not a guarantee of success. Here are the main advantages a franchise offers:Uniformity. You can capitalize on a uniform business format, instant brand recognition, tap training, and ongoing support from the franchise company.Lower risk. This can be a plus for less-experienced entrepreneurs. While starting a business alone can expose you to a high risk of failure, a franchise can buffer that risk somewhat because the franchise often includes a package that eliminates the guesswork often associated with starting a business.Proven track record. Franchising typically includes an existing product or service, a proven market method, equipment, inventory, and support, including hands-on business consulting and advice.Network power. Franchisees can gain brand recognition from national advertisements and promotions. In addition, there may be buying power opportunities when purchasing inventory, materials, and supplies through a network, which can keep prices down.Start-up cash. Some franchise companies provide financing plans.Indeed, these are advantages that can work for you. But before leaping, consider the potential disadvantages:Lack of power. Franchisees forfeit a certain measure of control over their day-to-day operations. If you have a robust entrepreneurial personality, you may have a problem handling the relationship if you start to feel you are more of a manager than a boss.Financial risks. Franchises can cost a great deal to start and generally include ongoing royalty fees that you often must pay even if an outlet hasn't earned significant income. Moreover, the central franchiser may face financial problems or go under.The "caged syndrome." You are typically committed to a franchising agreement that runs for several years, which can lock you into rigid business practices, fees, and operating rules.Negative exposure. Not all publicity is positive. Unethical management or business practices by one franchisee affect the entire system. For example, hygiene and cleanliness issues at one fast-food restaurant can hurt sales at the others in the chain, even if they have spotless records.Deciding to go ahead with a franchise is a complex and challenging task. Look at the Federal Trade Commission's booklet on franchising and then carefully discuss the issues with your attorney, accountant, or financial adviser. As with any investment, the more you know, the better prepared you are to make a go of it.
Before you sign ANYTHING, call me at 856-665-2121
Ron Cappuccio
]]>