You can use the actual expenses method to calculate your mileage deduction, which requires adding up all of the money spent operating your vehicle and multiplying it by the percentage that you used it for business. Or, you can use the standard mileage method, which requires adding up all of the miles you drove for business during the year and multiplying it by the standard mileage rate set by the IRS for that year.

Here’s a closer look at how to calculate your business mileage deduction using each of these two methods.

Using the Actual Expenses Method

To calculate your business mileage deduction using this method, you must keep careful track of all the money you spend related to the operation of your vehicle during the year. You should check with your accountant to find out what’s covered in your state, but in general, these expenses can include:

• Lease payments
• Insurance payments
• Regular maintenance (oil changes, tire rotation, etc.)
• Repairs
• New parts (tires, windshield wipers, lights, etc.)
• Fees (registration, inspection, etc.)
• Depreciation

Once you add these expenses together, you multiply the total by the percentage you use your vehicle for business. For example, if you spent $10,000 related to the operation of your vehicle during the year, and you used it 30% of the time for business and 70% for personal use, you’d deduct $3,000 (10,000 x .30 = 3,000).

You should be able to produce receipts or proof of payment for each of these expenses, as well as a mileage log for business use. Otherwise, the IRS can more easily disallow your claim.

Using the Standard Mileage Method

This is considered the more simple of the two methods because it does not take into account the operating costs for your vehicle. It only requires you to track your mileage for business use. You can do this by creating a log that includes the dates and times you drove, descriptions of your business activity, and odometer readings for each trip. You can do it by hand, on a spreadsheet, or with a mobile app.

Once you add up the miles you’ve driven for business over the year, you multiply the total by the standard mileage rate determined by the IRS for the year. For example, if you drove 5,000 miles for work during 2019 when the standard mileage rate was 58 cents per mile, then your deduction would be $2,900 (5,000 x .58 = 2,900).

Deciding Which Calculation to Use

If your employer doesn’t reimburse you for business miles driven in your vehicle, or if you’re self-employed, then you’re entitled to a business mileage deduction on your taxes.

Each method of calculating your mileage deduction offers advantages and disadvantages, and those can change depending on your situation. For example, the actual expense method may end up being best for you if you had a lot of vehicle costs, such as repairs, during the year.

You may want to try calculating your deduction using both methods to find out which one will give you the larger payoff. However, it’s best to consult with a tax professional to determine the type of mileage deduction calculation that’s right for you each year.

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After they access the website, taxpayers can use the “Help Me” tool, which asks for information such as their age, income, and state of residence. The tool then matches the taxpayer with one of the 12 software products that are available through the program. The IRS says each taxpayer will usually have several options to choose from. Taxpayers can review all the offers made by the 12 providers if they do not want to use the tool.

Once taxpayers select a product, they will be directed away from IRS.gov to the provider’s website to prepare their return. Taxpayers can also access Free File from their phone or tablet using the IRS2Go app. All active-duty military personnel who made $66,000 or less last year are eligible to use any of the 12 products.

The IRS also announced that it recently entered into new agreements with the 12 providers through Oct. 31, 2021, and that these agreements provide greater consumer protection to taxpayers using the products. Among the new protections is a prohibition on provider companies having any button or link on their Free File landing pages that would take taxpayers to non-Free File programs.

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For 2019, partnerships and other persons must report partner capital accounts consistent with the reporting requirements in the 2018 forms and instructions, including the requirement to report negative tax basis capital accounts on a partner-by-partner basis. This means that for 2019 taxpayers may continue to report capital accounts under any method available in 2018, which includes the tax basis, Sec. 704(b), GAAP, or any other reasonable method.

The IRS also further explained the 2019 requirement for partnerships and other persons to report a partner’s share of net unrecognized Sec.

704(c) gain or loss by defining this term in the notice. Solely to complete the 2019 Forms 1065, U.S. Return of Partnership Income; Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., Item N; and Form 8865, Return of U.S. Persons Concerning Certain Foreign Partnerships, Schedule K-1, Item G, the notice defines a partner’s share of “net unrecognized Section 704(c) gain or loss” as the partner’s share of the net (i.e., aggregate or sum) of all unrecognized gains or losses under Sec. 704(c) in partnership property, including Sec. 704(c) gains and losses arising from revaluations of partnership property.

Additionally, publicly traded partnerships are exempt from the requirement to report their partners’ shares of net unrecognized Sec. 704(c) gain or loss until further notice.

This notice also explains that the requirement in the 2019 draft instructions requiring partnerships to report to partners information about separate Sec. 465 at-risk activities will not be effective until 2020.

Finally, partnerships that comply with the reporting requirements in the notice will not be subject to any penalties. Including a Sec. 6722 penalty for failure to furnish correct payee statements, a Sec. 6698 penalty for failure to file a partnership return that shows required information, or a Sec. 6038 penalty for failure to furnish information required on a Schedule K-1 (Form 8865).

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Sec. 110(a) allows a lessee to exclude from income the amount of a qualified construction allowance received from a landlord to the extent the allowance does not exceed the actual costs incurred to improve the leased space.

For tenant allowance payments from a landlord to a lessee to be considered a qualified lessee construction allowance, the lease must be short-term and for retail space. Regs. Sec. 1.110-1(b)(2)(ii) defines a short-term lease as to any agreement for the occupancy or use of retail space for a term of 15 years or less. The lease term determined by taking the initial lease term in the lease agreement and including any lease extension options unless the rent is to renewed at a fair market value determined at the time of the renewal (Sec. 168(i)(3)).

Regs. Sec. 1.110-1(b)(2)(iii) defines retail space as space “that leased, occupied, or otherwise used by the lessee in its trade or business of selling tangible personal property or services to the general public, [and includes] space where activities supporting the retail activity performed.” Regs. Sec. 1.110-1(b)(3) also contains a purpose requirement, which requires that the tenant allowance be expressly provided for in the lease agreement (or an ancillary agreement) and be to construct or improve the qualified long-term real property for use in the lessee’s trade or business at the retail space. Personal property, even if it used in the retail space, will not qualify under the safe harbor.

Sec. 110 provides that improvements related to a qualified leasehold improvement allowance are determined to be owned by the landlord. For purposes of retail space, qualified property generally meets the following requirements:

It has a recovery period of 20 years or less, acquired before Jan. 1, 2020, and deemed qualified improvement property (Sec. 168(k)(2)(A)(i)). Once these guidelines are met, the improvements are then eligible to be treated as 15-year recovery qualified leasehold improvement property eligible for special depreciation, which includes 50% bonus depreciation for the tax year 2016.

When developing language within the lease agreement concerning the tenant allowance. The landlord should consider including a restriction on the use of funds to ensure the allowance is eligible to treated as qualified leasehold improvement property and for special depreciation allowance treatment under Sec. 168(k). Qualified leasehold improvement property carved out of the general definition for qualified property. As it applies specifically to improvements made to the interior of nonresidential real property. The property must be placed in service more than three years after the building was first placed in service, and space must be occupied solely by the lessee (Sec. 168(e)(6)(A)).

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“hard forks”and “airdrops”

A “hard fork” of a cryptocurrency owned by a taxpayer does not result in gross income for a taxpayer. If the taxpayer receives no units of the new cryptocurrency. However, taxpayers receiving an “airdrop” of units of a new cryptocurrency after a hard fork have ordinary gross income from the airdrop. The IRS ruled in Rev. Rul. 2019-24, issued Wednesday. The IRS also updated its Virtual Currency Transactions frequently asked questions on its website to reflect the ruling.

Rev. Rul. 2019-24 supplements basic guidance on the tax treatment of cryptocurrency or virtual currency that the Service issued in 2014 (Notice 2014-21).

Cryptocurrency, the IRS explains, is a type of virtual currency that uses cryptography to secure transactions that digitally recorded on a distributed ledger. Such as a blockchain. Distributed ledger records, shares, and synchronizes transactions as data on digital systems without any centralized storage or administration. The new revenue ruling addresses a specific type of cryptocurrency transaction known as a hard fork that is often, but not always, followed by an airdrop.

A hard fork is unique to distributed ledger technology and occurs when a cryptocurrency on a distributed ledger. Undergoes a protocol change resulting in a permanent diversion from the legacy or existing distributed ledger. A hard fork may create from one cryptocurrency a new cryptocurrency on a new distributed ledger in addition to the original cryptocurrency on the original distributed ledger.

The IRS explained that receipt of cryptocurrency from an airdrop generally occurs when it recorded on the new distributed ledger. But a receipt for tax purposes may occur later or, constructively, earlier, depending on when the taxpayer can exercise dominion and control over the new cryptocurrency. For example, an airdropped cryptocurrency might not be immediately credit to a taxpayer’s account at a cryptocurrency exchange. That does not yet support that cryptocurrency. In that case, the taxpayer treated as receiving the cryptocurrency later, once it credited to the taxpayer’s account and the taxpayer can transfer, sell, exchange, or otherwise dispose of it.

Examples:

The revenue ruling gives two examples: one of a taxpayer whose cryptocurrency undergoes a hard fork. Creating a new cryptocurrency, but units of the new cryptocurrency are not airdropped or otherwise transferred into an account. It is the taxpayer owns or controls. Because the taxpayer receives no units of the new cryptocurrency, that taxpayer does not at that point have a gross income for federal tax purposes.

The second example is similar to the first, except that in addition to the hard fork, units of the new cryptocurrency airdropped into the taxpayer’s distributed ledger address. The taxpayer can immediately dispose of the new units. In this case, because the taxpayer receives units of the new cryptocurrency. The taxpayer has accession to wealth and ordinary income in the tax year in which the new cryptocurrency units received. The amount of the ordinary income is the fair market value of the new units when the airdrop is recorded on the distributed ledger.

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Under Secs. 41(h) and 3111(f), enacted by the Protecting Americans From Tax Hikes (PATH) Act of 2015, P.L. 114-113, a qualified small business can elect to apply a portion of its Sec. 41 research credit against the employer portion of Federal Insurance Contributions Act (FICA) payroll taxes, effective for tax years beginning after Dec. 31, 2015. To be a qualified small business for a tax year, a business must have gross receipts of less than $5 million for the year and must not have had gross receipts for any tax year before the five-tax-year period ending with the year.

An eligible small business with qualifying research expenses can elect to apply up to $250,000 of its research credit against its payroll tax liability by filing Form 6765, Credit for Increasing Research Activities, with its timely filed business income tax return. Under a special rule for the tax year 2016, a small business that has already filed its 2016 return and failed to choose this option can still make the election by filing an amended return by Dec. 31, 2017.

A small business then claims the payroll tax credit by filing Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. This form must be attached to the business’s payroll tax return.

Flex Tax and Consulting Group has served and managed all types of tax and revenue collection for the U.S. for more than eight years. Our value-added services and solutions are based on innovative thinking that fits our valuable clients’ needs.

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The relief applies to individuals who relinquished or will relinquish their U.S. citizenship after March 18, 2010, and meet several other criteria listed below. Native-born or naturalized U.S. citizens generally may voluntarily relinquish their citizenship for reasons and under procedures listed at 8 U.S.C. Section 1481(a).

Under the Code, expatriates must comply with all federal tax requirements for the year of expatriation and the five immediately prior tax years. Also, Sec. 877A imposes a tax on “covered expatriates” that deems most property as sold for its fair market value on the day before the day of expatriation. The resulting net gain over $725,000 (for 2019) is includible in their income. A covered expatriate is one who, under Sec. 877(a):

• Has an average annual net income tax liability in the five tax years ending before the date of expatriation of more than a specified amount ($168,000 for 2019);
• Has a net worth of $2 million or more; or
• Cannot certify under penalty of perjury that he or she has met all applicable tax requirements for the five preceding tax years or fails to submit evidence of compliance the IRS may require. This certification can be made with Form 8854, Initial and Annual Expatriation Statement.

In other words, even expatriates with income tax liabilities and net worths below these thresholds may still be covered expatriates if they cannot make the certification.

Under the relief procedures announced Friday, individuals who meet specified requirements will not be considered covered expatriates for purposes of Sec. 877A and will not be liable for any unpaid taxes and penalties for the year of expatriation and previously, the IRS stated. As noted above, the expatriation must have occurred after March 18, 2010.

Also, for the six tax years at issue (the year of expatriation and the five immediately prior years), any failure to file required tax returns and pay taxes and penalties for the years at issue must have been due to the taxpayer’s nonwillful conduct. Required tax returns include income, gift, and information returns (the latter including Form 8938, Statement of Specified Foreign Financial Assets), and FinCEN Form 114, Report of Foreign Bank and Financial Accounts, commonly known as FBAR. Nonwillful conduct is that which is due to negligence, inadvertence, mistake, or a good-faith misunderstanding of legal requirements.

Besides, to be eligible for relief, the individual must:

• Have no filing history as a U.S. citizen or resident (not including Form 1040NR, U.S. Nonresident Alien Income Tax Return, under a good-faith but mistaken belief that the individual was not a U.S. citizen);
• Meet the above income tax liability limits for covered expatriates for five tax years ending before the date of expatriation and meet the $2 million-net-worth limit at the time of expatriation and when applying for the relief;
• Have an aggregate tax liability of no more than $25,000 for the six tax years at issue (after application of all applicable deductions, exclusions, exemptions, and credits, including foreign tax credits, but excluding penalties, interest, and the exit tax of Sec. 877A); and
• Agree to complete and submit all required federal tax returns for the six tax years at issue, including all required schedules and information returns.

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The final regulations also provide definitions of “federally declared disaster,” “federally declared disaster area,” “disaster loss,” “disaster year,” and “preceding year,” for these purposes.

Under the prior rules before 2016 (Regs. Sec. 1.165-11(e)), a taxpayer had to make the election to take a loss in an earlier tax year by the unextended due date for the taxpayer’s return, generally April 15. This short period to decide whether to elect relief put undue pressure on taxpayers and required the IRS to issue several extensions of time to make the election after large natural disasters.

Under the final rules, the deadline for the election to claim the loss on the prior year’s tax return is six months after the due date for filing the taxpayer’s federal income tax return for the disaster year (determined without regard to any extension of time to file). The regulations also extend the period for revoking the election to 90 days after the due date for making the election.

The procedures for making or revoking the election are described in both the final regulations and in Rev. Proc. 2016-53, which contains additional rules to ensure consistent return positions by taxpayers so they take a loss in only one tax year, and are not affect by the final regulations.

The final regulations, which are effective for elections and revocations made on or after the date they are published as final in the Federal Register, also remove Temp. Regs. Sec. 1.165-11T.

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Many amounts will increase in inflation in 2020. The standard deduction will increase to $24,800 for married individuals filing joint returns or surviving spouses. The $18,650 for heads of household, and $12,400 for unmarried individuals (other than surviving spouses). And the married individuals filing separate returns.

The maximum amount of the earned income tax credit (for taxpayers with three or more children) will increase in 2019.

The maximum amount of the adoption credit will increase to $14,300 up from $14,080 in 2019. That is also the maximum amount that will be excludable from an employee’s gross income for qualified amounts paid. Or expenses incurred by an employer under an adoption assistance program.

The 2020 exemption amounts for the alternative minimum tax will be $113,400 for married individuals filing joint returns and surviving spouses, $72,900 for unmarried individuals (other than surviving spouses), $56,700 for married individuals filing separate returns, and $25,400 for estates and trusts, all increased from 2019.

The Sec. 179 amount for tax years beginning in 2020 will be $1,040,000 with a phaseout threshold of $2,590,000, slight increases from 2019.

The qualified business income threshold under Sec. 199A(e)(2) will increase to $326,600 for married individuals filing joint returns. And $163,300 for married individuals filing separate returns, single individuals, and heads of household, all increased from 2019.

The Sec. 911 foreign earned income exclusion amount will increase to $107,600 from $105,900 in 2019.

The basic exclusion amount for determining the unified credit against the estate tax will be $11,580,000 for decedents dying in the calendar year 2020, up from $11,400,000 in 2019. The annual gift tax exclusion amount remains at $15,000. But the gift tax annual exclusion for gifts of a present interest to a spouse who is not a U.S. citizen will increase to $157,000 in 2020 from $155,000 in 2019.

Various penalty amounts for failure to file tax and information returns or furnish payee statements are also being adjusted for inflation for 2020.

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The new revenue procedure does not contain the per-diem rates for the current fiscal year.

Those published in Notice 2019-55, which contains the rates that are in effect from Oct. 1, 2019, to Sept. 30, 2020.

The TCJA suspended the miscellaneous itemized deduction that employees could take for unreimbursed business expenses. However, self-employed individuals and certain employees, such as armed forces reservists, fee-basis state or local government officials, eligible educators, and qualified performing artists, who deduct unreimbursed expenses for travel away from home may still use per-diem rates for meals and incidental expenses, or incidental expenses only.

The IRS explains in the revenue procedure that the TCJA amended prior rules to disallow a deduction for expenses for entertainment, amusement, or recreation paid or incurred after Dec. 31, 2017. Otherwise, allowable meal expenses remain deductible if the food and beverages purchased separately from the entertainment. The cost of the food and beverages is stated separately from the cost of the entertainment in the invoice or bill.

The new revenue procedure is effective for per-diem allowances for lodging, meal, and incidental expenses, or for a meal and incidental expenses only. That are paid to an employee on or after Nov. 26, 2019, for travel away from home on or after Nov. 26, 2019.

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Overdue to the misdeeds of an in-house bookkeeper or a third-party payroll service responsible for ensuring that a business meets its tax obligations. More often than not, however, employers, acting without bad intentions, use the withheld money to satisfy pressing trade obligations or to meet payroll, debts the nonpayment of which is likely to lead to the shutdown of the business and loss of employee jobs. Unfortunately, this strategy can prove extremely costly to both the business and its principals, generating exposure to substantial penalties for late payment or failure to pay at all.

Making the stakes even higher, the federal government has in recent years taken steps to increase the likelihood that employment tax cases will handled criminally. All of this means that tax advisers working with business clients cannot focus solely on strategies to minimize and pay the business’s income tax obligations but also must be extremely vigilant regarding employment tax duties.

The Tax Division of the U.S. Department of Justice (DOJ) pursues both civil litigation and criminal investigations and prosecutions for failure to comply with employment tax obligations. Recently. The DOJ has increasingly emphasized criminal prosecution of those who fail to comply with their obligations to withhold, account for, and pay over federal employment taxes.

The role tax professionals play in detecting and addressing nonpayment early is becoming increasingly important.

The Treasury Inspector General for Tax Administration (TIGTA) published a report about trends and recommendations for enforcement of employment tax obligations. TIGTA found that the number of employers with 20 or more quarters of delinquent employment taxes had grown from approximately 5,000 in 1998 to nearly 17,000 in December 2015. However, the report further notes that the IRS assessed 38% fewer trust fund recovery penalties from FY 2011 to FY 2015 due to decreases in collection personnel. Fewer collection actions make it even more important for tax professionals to discover and address delinquent employment tax issues early.

A business that has fallen behind on tax payments, without any apparent consequences, may tempted to continue nonpayment. As a result, the amount of the deficiency is likely to grow, increasing the likelihood of an eventual criminal referral. In that light, the clear trend of such a significant increase in the number of cases involving severe noncompliance is alarming. A tax professional detecting the nonpayment early and assisting the client in developing a feasible plan to pay the tax owed offers an important service. Moreover, to minimize the personal financial exposure of persons potentially responsible under Sec. 6672, a practitioner should be certain to designate any voluntary payments toward the trust fund portion of the delinquency. Again, the quicker the trust fund portion paid, the less likely the need for a trust fund recovery penalty investigation and the less likely there is to be a subsequent, or concurrent, criminal investigation.

Flex Tax and Consulting Group, is a comprehensive fee-based service that will help site visitors form an LLC in.the U.S. The site includes free access to a wealth of information, including a glossary of terms, the answers to frequently asked questions and detailed.

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The Protecting Americans From Tax Hikes Act of 2015 (PATH Act), P.L. 114-113, contained several provisions favorable to taxpayers that incur qualified research and development (R&D) expenditures. Perhaps most importantly, it made permanent the previously temporary credit for increasing research activities (R&D credit) and added provisions allowing the credit to claimed against payroll taxes. Or alternative minimum tax (AMT), advantages that eligible taxpayers may still be missing.

PAYROLL TAX CREDIT

Although an unused portion of an R&D credit can carried forward, before the PATH Act. Many small startups were unable to realize any benefit, as they operated at a loss and thus had no income tax liability to offset. A lot of such startups, moreover, incurred significant R&D expenditures. To remedy this situation, the PATH Act allows qualified small businesses (QSBs) for tax years beginning after Dec. 31, 2015. Electing to claim all or a portion of the R&D tax credit against the employer portion of Social Security taxes due. The maximum amount of the credit that can elected to offset payroll taxes in a given year is $250,000, and the election can only made for five tax years.

A QSB is a taxpayer with gross receipts for the tax year of less than $5 million that did not have gross receipts for any tax year preceding the five-tax-year period ending with the credit year. For example, a taxpayer claiming the payroll tax credit for the 2018 tax year must have had less than $5 million in gross receipts in 2018 and could not have had gross receipts in 2013 or prior. The purposes of the test, gross receipts reduced by returns and allowances and must be annualized for short tax years, and predecessors  taken into account. For any person other than a corporation or partnership, only the aggregate gross receipts of the person in carrying on all of that person’s trades or businesses are considered. Organizations exempt from tax under Sec. 501 are not eligible to claim the payroll tax credit.

AMT OFFSET

Before the enactment of the PATH Act, many taxpayers also were unable to realize the benefits of the R&D tax credit in a given year due to the application of AMT liability, which the R&D tax credit could not reduce. Fortunately, the PATH Act also allows eligible small businesses (ESBs) to use the R&D credit to offset their AMT liability for tax years beginning after Dec. 31, 2015. (The legislation known as the Tax Cuts and Jobs Act, P.L. 115-97, repealed the AMT for C corporations for tax years 2018 and following and, for individuals in tax years 2018 through 2025, increased the AMT exemption amount and the exemption’s phaseout threshold.)

For this purpose, an ESB, concerning any tax year, is a non-publicly traded corporation, a partnership. Or a sole proprietorship with average annual gross receipts for the prior three years of $50 million or less. All persons treated as a single employer under Sec. 52(a) or (b) or Sec. 414(m) or (o) treated as a single taxpayer whose gross receipts must aggregated. Gross receipts reduced by returns and allowances and must annualized for short tax years. And predecessors taken into account. Additionally, if the taxpayer was not in existence for the full three-prior-year period, the average gross receipts determined based on the period in which the taxpayer did exist. In the case of partnerships and S corporations, the partner or shareholder must also meet the gross receipts test for the AMT offset to apply.

COMMON APPLICATIONS OF R&D CREDIT

To take advantage of these favorable changes, the taxpayer must first determine which its projects or activities qualify for the credit. Then substantiate a nexus between those projects and the expenses incurred. Based on the age of the business, the taxpayer must also determine a base amount under one of two available methods. Common industries that qualify for the R&D tax credit include software development, manufacturing, communications, engineering (including structural, mechanical, and electrical), and pharmaceuticals.

Flex Tax and Consulting Group, is a comprehensive fee-based service that will help site visitors form an LLC in.the U.S. The site includes free access to a wealth of information, including a glossary of terms, the answers to frequently asked questions and detailed.

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As LLCs increase in popularity, CPAs confronted with complex tax issues, particularly when ownership of the LLC changes. The IRS issued revenue rulings 99-5 and 99-6 to address issues surrounding the conversion of a single-member LLC to a multiple-member LLC and the conversion of a multiple-member LLC to a single owner entity. This article explains the rulings and discusses proper accounting procedures for the transactions they highlight. Also, it supplements the examples in the rulings and offers some useful planning tips for CPAs.

EXECUTIVE SUMMARY

• THE IRS ISSUED REVENUE RULINGS 99-5 AND 99-6 to address issues related to the conversion of single-member LLCs to multi-member LLCs and the conversion of multi-member LLCs to a single-owner entity.
• REVENUE RULING 99-5 PROVIDES CPAs WITH GUIDANCE on proper accounting when a single-member LLC converts to a multi-member LLC. The ruling examines the transaction from two perspectives: the sole owner sells a half interest to someone else or the new owner contributes property in exchange for a half interest.
• THE BEST METHOD FOR BRINGING A NEW OWNER into the business depends on the selling owner’s intent. If the seller wants to increase his or her personal cash flow, selling a half interest may be the best approach. If the seller wants a capital infusion for the business, allowing someone to contribute property in exchange for a half interest will be preferable.
• REVENUE RULING 99-6 DEALS WITH INSTANCES WHEN a multi-owner LLC is converted to a single-owner entity. The ruling covers the transaction from two approaches: one LLC member sells his or her full interest to another member or all LLC members sells their full interests to a nonmember.
• THE BEST OPTION UNDER REVENUE RULING 99-6 ALSO depends on the seller’s motivation. Owners will often use the first approach when they have a contractual agreement to sell their interests to each other, such as in the event of death, divorce or retirement. The second approach is best when all owners want to leave the business.

SINGLE-MEMBER TO MULTI-MEMBER LLC

Revenue ruling 99-5 provides guidance on proper accounting procedures when a single-member LLC converts to a multiple-member LLC. The ruling addresses the conversion issue from two perspectives:

• A sole member sells a half interest to another person.
• The new member contributes property, including cash, to the LLC in exchange for a half interest instead of buying part of an existing member’s ownership interest.

Planning Tips  

• Carefully identify and track assets with multiple holding periods along with the holding periods of other

assets.

• Keep in mind that when advising clients on LLC conversions, the process generally has two distinct phases: (1) the type of conversion to undertake and its consequences and (2) post-conversion transactions when the LLC or its members may sell assets acquired during the conversion.
• When recommending a preferred method of LLC conversion to clients, remember that the member’s intent or preexisting membership agreements may determine the conversion method.
• Develop a clear understanding of LLC conversion methods—and the resulting tax consequences for all parties—because over time a CPA may represent a different party in each conversion.
• Remember that conversion may invoke the three-tier basis allocation process outlined in IRC section 732.

MULTI-MEMBER TO SINGLE-MEMBER LLC

Revenue ruling 99-6 provides guidance when a multiple-member LLC is converted to a single-owner entity for tax purposes. The ruling also addresses the conversion issue from two perspectives.

• One LLC member sells his or her full ownership interest to another member, making the transferee the sole owner.
• LLC members sell their full ownership interests to a nonmember.

THE PREFERRED BUSINESS ENTITY

The importance of revenue rulings 99-5 and 99-6 will increase as the LLC continues to become America’s preferred business entity. While the LLC offers many tax and nontax advantages, it also offers a great disadvantage: The application of subchapter K and its myriad intricate partnership taxation rules and procedures. Unfortunately, as LLCs become more prevalent, CPAs and their clients will encounter complex partnership issues, such as those in revenue rulings 99-5 and 99-6, more frequently. Proper planning requires a strong understanding of the technical interplay between the sellers’ desire and the various partnership provisions in the IRC. The inability to resolve issues such as split holding periods, gain or loss recognition and basis will leave some taxpayers with undesirable present and future tax consequences.

Flex Tax and Consulting Group, is a comprehensive fee-based service that will help site visitors form an LLC in.the U.S. The site includes free access to a wealth of information, including a glossary of terms, the answers to frequently asked LLC questions and detailed state-by-state incorporation procedures.

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Deciding Between an Asset Sale or Entity Sale

The information below was first published by the Sustainable Economies Law Center, East Bay Community Law Center, and Green-Collar Communities Clinic in their Legal Guide to Cooperative Conversions

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Despite the benefits of Opportunity Zones, this newly created investment territory is unfamiliar to most investors. In this article, we explain the basics of the Opportunity Zones, their tax incentives, and outline ways to invest through an Opportunity Fund.

First, let’s look at what Opportunity Zones are and why they existed.

How do Opportunity Zones Work?

The Opportunity Zone program was created under the Investing in Opportunity Act, which was part of the larger Tax Cuts and Jobs Act of 2017. The act was designed to encourage private investment in economically distressed neighborhoods by offering investors. Accessing to new capital gains tax incentives in exchange for placing qualified investments in Opportunity Zone communities. Through a new investment vehicle called an Opportunity Fund.

Today, there are more than 8,700 Qualified Opportunity Zones in all 50 states in the US. The District of Columbia, and in five US possessions, which cover approximately 12% of all census tracts in the US. Current Opportunity Zones received their designation in 2018 will retain that designation for ten years.

How does the Opportunity Zone Program Differ from Tax Credit Programs?

Several tax credit programs intended to encourage investment in low-income areas existed before the creation of the Opportunity Zone program. Tax credit programs such as the New Markets Tax Credit Program and Low Income Housing Tax Credit Program. Generally rely more upon government agencies to function, and are more costly to administer. Tax credit programs are also subject to annual Congressional approval. Or tax credit allocation authority, which are limited in supply due to the nature of tax credit programs. Because the tax credit system limits the number of credits which can be issued each year. There’s an intrinsic limit on the number of investors who can participate. The total amount of dollars that can be invested into the development of a community under these programs.

Therefore, the availability of Opportunity Funds open for investment is not artificially limited. Instead, it’s limited only by the number of Opportunity Funds offered in the private market and by the investor requirement of each individual fund.

What Tax Incentives do Opportunity Zones Offer?

In exchange for investing in Qualified Opportunity Zones according to Opportunity Zone program regulations. Investors can access significant tax incentives exclusive to the Opportunity Zone program. To access these tax benefits, investors must invest in Opportunity Zones specifically through an Opportunity Fund.

When an appreciated asset is sold or otherwise divested, an investor realizes a capital gain, which is typically a taxable event. If an investor reinvests that realized capital gain into a Qualified Opportunity Fund, they can defer and reduce their tax liability on that gain. Additionally, they can also potentially realize all capital gains earned from their Opportunity Zone investment tax-free.

However, due to the fact that the Opportunity Zone program is intended to encourage positive growth within economically distressed communities. There are restrictions on the types of investments that an Opportunity Fund can hold.

Which Opportunity Zone Investments Qualify for an Opportunity Fund?

To qualify for tax incentives outlined above, Opportunity Zone investments must be made through a qualified Opportunity Fund. A qualified Opportunity Fund is a US partnership or corporation that intends to invest 90% or more of its holdings in “Qualified Opportunity Zone property.” Qualified Opportunity Zone property is limited to:

• Interests in a partnership that operates as a qualified business in a Qualified Opportunity Zone.
• Stock ownership of qualified businesses whose operations are based mostly or entirely within an Opportunity Zone.
• Property, such as real estate, located within an Opportunity Zone.

The post How to Invest in Opportunity Zones: Options to Get Started appeared first on Flex Tax and Consulting Group (FTCG).

Flex Tax and Consulting Group discusses the QSBS election – a method used to sell shares in a C corporation completely or partially income tax-free.

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• Mortgage interest deductions capped
  In the past, homeowners who took itemized deductions could count interest payments on debt related to buying, building or “substantially improving” a home — on debt up to $1 million. That’s been capped at $750,000 and applies to homes purchased after Dec. 15, 2017. Homes bought prior to the new law are grandfathered, but this may impact people’s decision to look for new homes, as they could see a reduction in the mortgage interest they can claim going forward.
• SALT deductions capped
  State and local taxes (SALT), no matter how much of them you had to pay, aren’t the same caliber of deduction anymore. You can now only claim deductions on the first $10,000 in SALTs—unwelcome news if you live in a high-tax state.

Do I Even Want to Itemize at All?

While some may feel crimped with the loss or limitation of deductions related to mortgage debt and taxes, others may find that the more generous standard deductions offered by TCJA Cuts & Job Act) of 2017 may hold some relief.

If you took a bigger-than-expected hit when you filed in 2019, you might want to see if taking the standard deduction, rather than itemized deductions, is worth a shot. Under the TCJA, standard deductions jumped to $12,000 for single filers, $18,000 for heads of household and $24,000 for joint filers (tax brackets may have shifted in your favor, too). It might be a simpler and cheaper option than trying to get over the now-higher bar for itemized deductions.

Make a Strategy for 2020 (And Get Help if You Need It!)

If you found your pockets lighter after your first go-round with the TCJA’s new limitations, now is the time to start finding ways to offset some of the damage. Some years you may want to itemize, while in others you go for the standard deduction. If you regularly make and track your charitable deductions, there may be ways to bundle your giving so that you can maximize your writeoffs (we’ll explore this one in more detail in an upcoming post). While the standard deduction scenario has become simpler, itemizing can more complicated. It’s usually a good idea to spend a few minutes talking with your tax preparer or financial planner so you can better navigate the new landscape of restrictions when it’s time to file for tax year 2019.

The post INVESTMENT-SPECIFIC INTEREST AND TAXES appeared first on Flex Tax and Consulting Group (FTCG).

But with some careful record-keeping and organization, you can take away some of that stress and make filing next year’s tax return just a little bit easier.

Here are a few tax tips for organizing your tax records after you file and being better prepared when 2020’s taxes are due.

1. Create a file for this year’s tax return

As soon as you’ve filed your return, take time to create a single location for storing all physical forms, documents, schedules, and other records of this year’s taxes—as well as a clear, visible label that makes finding that folder easy in the future.

This not only makes the process of filing your taxes a little faster when your taxes are due; but it also makes it easier to locate last year’s records should the tax collector choose your return for an audit.

2. Store your records online

There’s little that hasn’t gone digital these days. So why should your tax preparation records be any different?

Saving past tax returns on your computer can make it easy to access when your 2020 taxes are due. If you use a safe, secure cloud service, all tax documents you scan or upload onto your device are backed up automatically, ensuring these records never get lost and can be pulled anytime you need from one convenient location.

If you’re the type that likes to keep paperwork to a minimum, storing your tax records digitally can also be a great way to manage your tax bracket information while making clutter disappear.

3. Be a tax preparation pro by keeping your receipts

Itemizing your deductions can be a great way to reduce your tax burden when your 2020 taxes are due. And taking full advantage of itemized deductions means keeping all your receipts, and documents that become extremely valuable during the tax preparation season.

Making a habit of keeping and storing every receipt—especially those related to large purchases like cars, house remodeling materials, etc.—can save you money on your next tax return while providing the tax collector the documentation they need to verify your deductions. 

4. Start organizing now

It’s never too early to organize your tax records for the 2020 tax season. Being proactive in your tax preparation not only helps alleviate the stress of filing next year’s return, but it also provides the opportunity to face the tax collector with confidence—and to minimize the potential for mistakes once the new year rolls around.

Creating a new file now to hold tax documents and receipts is a good place to start while gathering information on any new credits or deductions you’re likely to claim next year can make it easier to complete related forms in the future. You can also begin to estimate the tax bracket you’re likely to fall within when taxes are due, as well as any steps you can take to mitigate your expected tax burden.

The post FOUR TAX PREPARATION TIPS TO CONSIDER FOR 2020 appeared first on Flex Tax and Consulting Group (FTCG).

Earning More Than the Minimum Income Requirement

The IRS doesn’t tax income that is equal to or less than the amount of the standard deduction. Tax-exempt income is not include in this calculation. So if you don’t earn more in annual income than the standard deduction. And you aren’t claim as a dependent by another taxpayer, then you don’t have to file a tax return. As an example, if you’re single, younger than 65, and earn at least $12,000, the total of the tax year 2018 standard deduction for a single taxpayer. You must file a tax return. A free, simple-to-use tax calculatorcan help determine the need to file a tax return for other individual scenarios. The IRS also lists the minimum income requirement amounts to file a tax return on page 2 of Publication 501.

Dependents Earning Income

No matter whether they’re an adult or a child, those claimed as a dependent by a taxpayer on a separate tax return held to different IRS filing requirements. Because a dependent cannot claim their own exemption, when their earned income is more than the standard deduction for a single taxpayer, which in tax year 2018 is $12,000, then they required to file a tax return. But when the dependent’s income unearned, such as from interest or stock dividends, the minimum income requirement to file drops to above $1,050.

Affordable Care Act (ACA) Subsidies

For a qualifying individual to receive their tax subsidy for purchased health insurance coverage under ACA, they required to provide their income level. The government verifies this income information via the individual’s federal tax return. Even if you have never filed a tax return before, which may be the case if you didn’t make enough money, you may requir to file one to receive a tax subsidy for health insurance.

Getting Tax Refund

If you’re earning a paycheck and excessive federal taxes are being withheld, you need to file a tax return to get your refund. So let’s say you’re a single taxpayer earning $5,000 annually and $600 is being withheld for federal tax. While you are not legally require to file a tax return because you earned less than the standard deduction ($12,000), you are entitle to a refund of the entire $600. Since the IRS doesn’t issue refunds unless a tax return is filed, if you want your refund, start filing!

The post DO I HAVE TO FILE TAXES? appeared first on Flex Tax and Consulting Group (FTCG).

Fortunately, the investment tax and interest deduction worksheet may provide a way to offset some of that cost. Help ensure more of that money stays in your pocket.

Start by Learning What is Deductible

If you’ve borrowed money to buy property to invest, you’ve likely paid interest on that loan. According to the IRS, that interest now qualifies as an “investment interest expense,” which may be deductible on the investment tax and interest deduction worksheet.

For example, if you’ve taken out a loan against, say, the equity in your home, and used that money to buy stock, you paid investment interest. And this expense may now be used to reduce your tax burden.

The investment interest deduction applies only to paid interest on money used to buy an investment property. It will produce investment income, be it through interest, annuities, or dividends. When the investment property generates nontaxable income—such as tax-exempt bonds—the interest deduction is not allowed.

You may also deduct any investment interest expenses that were disallowed during the previous year, taking a little more sting out of your upcoming tax bill.

How Much Tax Will I Pay?

So, how much tax will you pay on your net investment income? When it comes to investments purchased with borrowed money. This depends not only on how much loan interest you paid over the last year. And also on the net income the investment property happened to create.

Once you’ve calculated your net investment income and your investment interest expense paid (current + disallowed). Your tax and interest deduction worksheet will ask for a smaller number. This will be your total deduction and the amount ultimately affecting how much tax you’ll pay.

Is There Anything I Can’t Claim?

Generally, any interest paid for investments in “passive activities” won’t qualify for the interest expense deduction. This includes holding an ownership stake in a business that you’re not materially involved in running.

For instance, borrowing $10,000 to buy a stake in a friend’s company is undoubtedly an investment. But if you aren’t involved in the daily operation of that business in any way, you’re engaged in a passive activity. And any interest you paid on the original loan can’t be claimed as an investment interest expense.

Using the Investment Tax and Interest Deduction Worksheet

You can claim investment interest expenses only if you itemize your deductions, which is typically done on your Schedule A. You may also be required to complete Form 4952, which lays out your deduction in more detail.

You’re exempt from filling out the latter form if you meet these three conditions:

• Your investment income from interest and ordinary dividends minus qualified dividends is more than your investment interest expenses.
• You don’t have any other deductible investment expenses.
• You have no disallowed investment interest expenses from the previous year.

The post USING THE INVESTMENT TAX AND INTEREST DEDUCTION WORKSHEET appeared first on Flex Tax and Consulting Group (FTCG).

Fortunately, there’s the W4 tax from, which allows a bit of latitude when it comes to what your employer can withhold each new payday.

Claiming W4 allowances is one of the biggest ways you can not only affect your tax bill but also how much you get to take home. Making it important to know what allowances do and how to make them work best for your unique tax situation.

What Is Tax Withholding?

Any time you start a new job, you fill out a W4. Known in tax-pro speak as the Employee’s Withholding Allowance Certificate. This form essentially lets your new employer know how much of each paycheck you want to be set aside for the IRS.

Employers required to withhold taxes in every state, though there are numerous state and local governments across the country that do so as well.

The amount withheld from your check depends mostly on:

1) how much you make

2) how many W4 allowances you claimed at the beginning of your tenure. Claiming more allowances means fewer withholdings and bigger paydays.

What Exactly are W4 Allowances?

Allowances are more or fewer exemptions from paying a certain amount of federal tax. When you qualify for an allowance, you can legally claim that exemption on your W4—and a little less will withheld from your paycheck.

Each W4 provides a brief explanation for each allowance available to the taxpayer. The number you can claim depends on your particular tax situation.

Allowances may claimed:

• For yourself, if no one can claim you as a dependent.
• You’re the head of the household.
• If you married and filing a joint tax return at the end of the year.
• Or if you married with one or more dependents.

How Many Should I Claim?

Determining the ideal number of allowances based not only on how many you qualify for but also on your financial situation, your short- and long-term needs and the tax bill you don’t mind facing at the end of the year.

For instance, claiming too many allowances may put more money in your pocket now, but it will also lead to less being sent to the IRS—meaning you will likely owe more taxes and possible IRS penalties when next April rolls around.

On the other hand, claiming too few allowances may help you stay caught up with the IRS throughout the year, but it also results in smaller paychecks. This, in turn, means less to pay bills and spend on items you might otherwise afford.

Can I Update My W4?

Absolutely. The IRS recommends doing so any time you experience a major life event. This can include anything from getting married and having a child to you or your spouse getting or losing a job. The things that directly affect the tax you owe at any point during the year. The IRS also recommends updating your withholding allowance any time tax reforms enacted, ensuring that you’re not surprise when completing your taxes.

The post WHAT ARE W4 ALLOWANCES? appeared first on Flex Tax and Consulting Group (FTCG).

File Away Your Tax Return and All Related Records

Once you’ve filed your return, it’s a good idea to create a single location to keep all the information related to the tax year for which you just submitted. If you keep physical records, this means printing off your return. Including all additional schedules, and sticking everything in a file, along with all the forms you received that reported income, expenses, or other tax-related information. These are forms like the 1099 MISC, 1099 INT, etc.

It’s also a good idea to include receipts for purchased items you’ve claimed as deductions and other records. You’ve used for filing your taxes, such as accounting reports and mileage records. Then if by chance the IRS chooses to audit your tax return, you won’t have to scramble to find all the records you need to prove why you claimed these deductions and credits.

Get Organized for Next Year

There’s no better time for organizing tax records than right now. Since you just filed your taxes, you’re aware of what was hard about the process and what parts of filing you can streamline. This may mean creating a physical file or a file on your computer where you can store receipts as they come in. Since more and more receipts arrive via email, you may want to create a separate receipts folder in your email account so they’re easy to find.

If you think you’ll be able to claim new deductions or credits next year, now is the time to start gathering the information to do so. Or if you expect to lose a credit or deduction you claimed last year, you can start considering other ways you can lower your tax burden to compensate. This may mean contributing more to your retirement plan or donating to charity. Being proactive makes it a lot easier to find everything you need when you’re ready to file your taxes next year.

Keep Receipts

You may be able to itemize your deductions, consider keeping all your receipts. When you itemize deductions, you can deduct the amount of sales tax you paid on goods throughout the year. Although the IRS provides a sales tax calculator that calculates a standard tax deduction. It based on your income and ZIP code. You may have spent more than the standard, especially if you made a large purchase. Likely buying a car or building a house, and paid sales tax on the supplies.

If you create a spreadsheet where you can enter the amount of sales tax on everything you’ve bought, it will ultimately save you a lot of time during tax season. This way, you’ll know whether you spent more than the standard tax deduction you’re eligible for.

Consider Storing Your Records Online

When you prefer to keep the amount of paperwork you acquire to a minimum, you can choose to store all your current and past tax information on your computer. Or — even better — online using a cloud service. You do store it on your computer, and be sure you make regular backups. If you subscribe to a cloud service, the information you store on your computer will automatically backup anytime you’re connect to the Internet, ensuring you never lose those records. If you have paper records, you can scan them and upload them onto your computer so you can store everything in one convenient location.

By getting organized now, you can save yourself a lot of time and more than a few headaches when the next tax season comes around. These tips on organizing tax records after you file will make the process a whole lot easier.

The post Organized Your Tax Paperwork appeared first on Flex Tax and Consulting Group (FTCG).

When it’s time to file a federal income tax return for your small business, there are various ways you can do it, depending on whether you run the business as a sole proprietorship or use a legal entity such as an LLC or corporation.

Each type of entity requires a different tax form on which you report your business income and expenses. Regardless of the form you use, you generally calculate your taxable business income in similar ways.

Step 1—Collect your records

Gather all business records. Before filling out any tax form to report your business income, you should have all records in front of you that report your business earnings and expenses.

If you use a computer program or a spreadsheet to organize and keep track of all transactions during the year, calculating your income and deductions is much easier than trying to remember every sale and expenditure that occurred during the year.

Step 2—Find the right form

Determine the correct IRS tax form. You always need to report your business earnings to the IRS and pay tax on them but choosing the right firm to report earnings on depends on how you operate your business.

Many small business owners use a sole proprietorship which allows them to report all of their business income and expenses on a Schedule C attachment to their income tax return. If you run the business as an LLC and you are the sole owner, the IRS also allows you to use the Schedule C attachment. However, if you use a corporation or elect to treat your LLC as one, then you must always prepare a separate corporate tax return on Form 1120.

Step 3—Fill out your form

Fill out your Schedule C or Form 1120. If you will be reporting your business earnings on Schedule C, you can search the IRS website for a copy to generate the form for you after you input all of your financial information.

Schedule C is a simple way for filing business taxes since it is only two pages long and lists all the expenses you can claim. When complete, you just subtract your expenses from your business earnings to arrive at your net profit or loss. You then transfer this number to your income tax form and include it with all other personal income tax items.

However, if you use Form 1120, you calculate your taxable business income in the same way, but the form requires more details that may not always apply to a small business. The biggest disadvantage of filing Form 1120 is that it is separate from your income tax return.

Step 4—Pay attention to deadlines

Be aware of different filing deadlines. When you use a Schedule C, it becomes part of your Form 1040 and therefore, no separate filing deadlines apply. It is generally subject to the same April 15 deadline.

If you are taxed as a C-Corp, you need to file a Form 1120, you must file it by the 15th day of the fourth month following the close of the tax year, which for most taxpayers is April 15. If you are taxed as an S-Corp, you need to file a Form 1120S, you must file it by the 15th day of the third month following the close of the tax year, which for most taxpayers is March 15. You cannot send this form to the IRS with your income tax return.

The post How to File Federal Income Taxes for Small Businesses appeared first on Flex Tax and Consulting Group (FTCG).

Payroll taxes, including FICA tax, are what your employer deducts from your pay and sends to the IRS, state or other tax authority on your behalf. Here are the key factors, and why it’s important to monitor your withholding tax.

What is the FICA tax? 

FICA tax is a combination of a 6.2% Social Security tax and a 1.45% Medicare tax the IRS imposes on employee earnings. For 2019, only the first $132,900 of earnings is subject to the Social Security part of the tax. A 0.9% additional Medicare tax may also apply if earnings exceed $200,000 if you’re a single filer or $250,000 if you’re filing jointly. Typically, employers deduct FICA tax from employee paychecks and remit the money to the IRS on behalf of the employee. FICA stands for Federal Insurance Contributions Act.

What is the withholding tax? 

When people talk about “withholding,” they’re often referring to Social Security and Medicare (which together make up FICA tax), plus a few other types of taxes that also might come out of your pay. Here’s a breakdown.

• Social Security: 6.2%.Frequently labeled as OASDI (it stands for old-age, survivors and disability insurance), this tax typically is withheld on the first $132,900 of your wages in 2019. Paying this tax is how you earn credits for Social Security benefits later.
• Medicare: 1.45%.Sometimes referred to as the “hospital insurance tax,” this pays for health insurance for people who are 65 or older, younger people with disabilities and people with certain conditions. Employers typically have to withhold an extra 0.9% on the money you earn over $200,000.
• Federal income tax.This is an income tax withheld from your pay and sent to the IRS by your employer on your behalf. The amount largely depends on what you put on your W – 4.
• State tax:This is income tax withheld from your pay and sent to the state by your employer on your behalf. The amount depends on where you work, where you live and other factors, such as your W-4 (and some states don’t have an income tax).
• Local income or wage tax:Your city or county may also have an income tax. This money might go toward such expenses as the bus system or emergency services.

What are these other payroll taxes I hear about?

• FUTA tax:This stands for Federal Unemployment Tax Act. The tax funds a federal program that provides unemployment benefits to people who lose their jobs. Employees do not pay this tax or have it withheld from their pay. Employers pay for it.
• SUTA tax:The same general idea as FUTA, but the money funds a state program. Employers pay the tax.

Self-employment tax: If you work for yourself, you may also have to pay self-employment taxes, which are essentially extra Social Security and Medicare taxes. That’s because the IRS imposes a 12.4% Social Security tax and a 2.9% Medicare tax on your net earnings. Typically, employees and their employers split that bill. But self-employed people pay the whole thing. (For 2019, only the first $132,900 of earnings is subject to the Social Security portion.) A 0.9% additional Medicare tax may also apply if your net earnings from self-employment exceed $200,000 if you’re a single filer or $250,000 if you’re filing jointly. Because you may not be receiving a traditional paycheck, you may need to file estimated quarterly taxes instead of withholdings.

How does my employer calculate my FICA or withholding tax?

The amount your employer withholds from your check largely depends on what you put on your Form W-4, which you probably filled out when you started your job. Here are some things to know:

• Form W-4 asks about your marital status, dependents and other factors to help you calculate the number of withholding allowances to claim. The more allowances you claim, the less tax will be taken out of your paycheck.
• What you put on your W-4 then gets funneled through something called withholding tables, which your company’s payroll department uses to calculate exactly how much federal and state income tax to withhold.
• You can change your W-4 at any time. Just download a blank one from the IRS website, fill it out and give it to your human resources or payroll team.

Why do I have to pay FICA tax?

Employers have to withhold taxes from employee paychecks because taxes are a pay-as-you-go arrangement in the United States. When you earn money, the IRS wants its cut as soon as possible.

Some people are “exempt works”, which means they elect not to have federal income tax withheld from their paychecks. Social Security and Medicare taxes will still come out of their checks, though.

Typically, you become exempt from withholding only if two things are true:

• You got a refund of all your federal income tax withheld last year because you had no tax liability.
• You expect the same thing to happen this year.

Why you need to manage your withholding tax

Remember, one of the big reasons you file a tax return in April is to:

• Calculate the income tax on all of your taxable income for the year.
• See how much of that tax you’ve already paid via withholding tax.

Turns out you’ve overpaid, you’ll probably get a tax refund. If it turns out you’ve underpaid, you’ll have a tax bill to pay.

If you ended up with a huge tax bill in April and don’t want another, you can use Form W-4 to increase your withholding. That’ll help you owe less (or nothing) next April.

You got a huge tax refund. Consider using Form W-4 to reduce your withholding. You’re giving the government a free loan and — even worse — you might be needlessly living on less of your paycheck all year. It may feel great to get a tax refund from the IRS, but think of how life might’ve been last year if you’d had that extra money when you needed it for groceries, overdue bills, getting the car fixed, paying off a credit card or investing.

The post How FICA Tax and Withholding Tax Work in 2019 appeared first on Flex Tax and Consulting Group (FTCG).