This tax season, we’ve worked through many cases involving transactions like the Scale AI restructuring and Meta-related investments. In particular, one pattern keeps coming up. Clients receive a Form 1099-DIV with a large number in Box 3, and that amount is often much higher than what they originally paid for their shares.

Naturally, the first reaction is confusion. Many clients ask: “I didn’t sell anything… so why is there tax?”

Understanding what Box 3 actually means

First, it’s important to clarify that Box 3 is not dividend income. Instead, it represents a nondividend distribution.

In practice, the IRS applies a simple rule. You recover your original cost first. Then, any remaining amount becomes capital gain. Therefore, the tax outcome depends heavily on your basis.

Walking through a simple example

Let’s look at a straightforward example.

You exercised ISOs earlier:

• Shares: 10,000
• Exercise price: $2.00
• Total cost (basis): $20,000

Later, as part of a transaction like Scale AI / Meta:

• You receive: $150,000 cash
• You still hold all your shares

Now, the math becomes clear.

First, you recover your $20,000 basis. After that, the remaining $130,000 becomes capital gain:

$150,000 − $20,000 = $130,000

Even though you didn’t sell any shares, the IRS treats the excess like a sale.

Adding the AMT layer

Next, we need to consider AMT, especially if your shares came from ISOs.

At the time of exercise:

• Fair market value: $6.00
• Exercise price: $2.00
• Spread: $4.00 per share

As a result, the AMT adjustment equals:

10,000 × $4.00 = $40,000

You report this amount as additional income under AMT, even though you didn’t sell anything.

Why AMT shows a different gain

Because of the ISO adjustment, AMT uses a different basis.

• Regular basis: $20,000
• AMT basis: $60,000

Now, when we recompute the gain:

$150,000 − $60,000 = $90,000 AMT gain

So, you end up with two different results.

• Regular gain: $130,000
• AMT gain: $90,000

The difference is $40,000.

How this appears on your tax return

This difference flows through Form 6251.

• Line 2i shows +$40,000 from the ISO spread
• Line 2k shows −$40,000 from the lower AMT gain

Together, they offset. This outcome is expected and reflects the correct mechanics.

Why this surprises so many people

On one hand, you didn’t sell shares. On the other hand, you received a large amount of cash. Because your original basis was low, most of that cash becomes taxable gain very quickly.

As a result, many clients feel caught off guard by the size of the tax impact.

Common patterns we’ve observed

Across many cases this season, we’ve consistently seen:

• Large Box 3 distributions
• Low exercise cost from early equity
• Significant capital gains without an actual sale
• AMT adjustments layered on top

Final takeaway

In summary, these transactions are not simple income events. Instead, they follow a sequence:

• First, basis is recovered
• Then, capital gain is triggered
• Finally, AMT adjustments are applied if ISOs are involved

If you received a large Box 3 amount, it’s important to review how your basis and AMT were handled. Small differences in calculation can lead to significant changes in tax.

If you’re seeing something similar on your return, you can check with your tax advisor, or feel free to reach out to us. We’ve worked through many of these cases this season and are happy to help review your situation.

#ScaleAI #Meta #StockCompensation #ISO #AMT #CapitalGains #StartupEquity #TaxPlanning #PrivateEquity

The post Scale AI / Meta Transaction — What That Cash Dividend Actually Means for Your Taxes (Simple Breakdown + Case Study) appeared first on Flex Tax and Consulting Group (FTCG).

Understanding the OBBBA Changes

Many high-earning individuals focus on mortgage rates when buying a house. However, few realize that tax law timing can have a six-figure impact on their real after-tax cost of ownership.

The One Big Beautiful Bill Act (OBBBA), effective July 2025, introduced several key adjustments affecting homeowners and real estate investors. Consequently, understanding how these new provisions interact with income, property value, and filing status is critical for effective planning.

Key Changes

Scenario: High-Income California Buyer

Profile:

• Annual Income (W-2 + bonus): $500,000
• Filing Status: Married Filing Jointly
• Home Purchase: $2,000,000 primary residence in Los Angeles
• Down Payment: $500,000
• Mortgage: $1,500,000 at 6% interest
• Annual Property Tax: 1.2% of value = $24,000
• State Income Tax (CA): ~9.3% marginal = $46,500
• Other Itemized Deductions (charity, etc.): $5,000

Before OBBBA (Old Rules)

1. SALT Deduction Cap

• Combined CA income tax ($46,500) + property tax ($24,000) = $70,500
• SALT deduction capped at $10,000
• Result: $60,500 in lost deduction potential

2. Mortgage Interest Deduction

• Interest on first $750,000 of mortgage debt deductible
• Mortgage = $1,500,000 → 50% of interest deductible
• Annual interest = $90,000 × 50% = $45,000 deductible

3. Total Itemized Deductions

Effective Federal Tax Benefit:
$60,000 × 37% = $22,200 reduction in federal tax liability

After OBBBA (New Rules)

1. SALT Deduction Cap Raised

• New cap = $40,000, phased out for AGI > $500K
• In this case, assume partial phase-out allows $30,000 deduction

2. Mortgage Interest Deduction

• Rule unchanged ($750K limit), but made permanent
• Still $45,000 deductible

3. Total Itemized Deductions

Effective Federal Tax Benefit:
$80,000 × 37% = $29,600 reduction in federal tax liability

Net Difference

Over a 10-year mortgage horizon, that’s roughly $74,000 in additional tax savings purely from timing and deduction differences.

Strategic Takeaways

1. Buying after OBBBA is not automatically better — it depends on income, state, and timing.
   For AGI over $500K, the SALT cap benefit begins to phase out.
   For those below, the new $40K limit offers substantial relief.
2. Property-tax prepayment and mortgage structuring are now bigger levers than interest rates.
3. For mixed-use properties, entity-level PTE elections can bypass individual SALT limits.
4. Accelerate qualifying energy improvements before 2025 year-end to maximize remaining credits.
5. Maintain digital documentation of all property-related payments and lender reports to prevent audit exposure.

Conclusion

For high-earning individuals, real estate isn’t just an investment — it’s a strategic tax tool.
The One Big Beautiful Bill Act widened opportunities for deduction recovery, especially through the expanded SALT cap and clarified entity rules, while also tightening compliance.

In practice:
A $2 million home in California now produces roughly $7,400 more in annual federal tax savings under the new law.
Combined with proper income and entity planning, this can result in over $70,000 in additional long-term savings.

At Flex Tax & Consulting Group, we help clients structure real estate purchases and ownership plans to align with the latest tax legislation — ensuring every major financial decision maximizes after-tax results.

Don’t just buy a home. Structure it — the right way, the first time.

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Restricted Stock Units (RSU)

Let’s say; for example, you were granted 4,000 RSU with a four-year vesting schedule and a one-year cliff. Then, six months after the grant, your company transferred you out of California.

After your first year, 25% of your RSU vest, To know what you owe the state of California for this, you’ve to understand how many days you performed services in the state of California from the grant date to the vesting date. 

If the recipient was a resident of California when the RSUs were granted, they might still be liable for California state tax on the RSU income even if they move to another state. The allocation ratio, calculated based on the number of workdays spent in California between the grant date and vesting date, should be used to determine the amount of RSU income allocable to California.

*Allocation Ratio = (total workdays in CA between the grant date and vest date)/ (total workdays between the grant date and vest date)

If the recipient moves to a state with no income tax, such as Texas or Washington, they will only be taxed by the state of residency when the RSUs vest or are sold. However, if the recipient moves to a state with an income tax, such as Massachusetts, they may be double taxed by both states for the same income.

Incentive stock options (ISO), Non-Qualified Stock Options (NSO)

Regarding ISO and NSO, it will be the same allocation, but use the exercise date instead of the vesting date to calculate the ratio. 

Employee Stock Purchase Plan (ESPP) 

If you exercise an option under an employee stock purchase plan while a California resident or nonresident and later sell the stock in a qualifying or disqualifying disposition while a nonresident, California will tax the resulting ordinary income to the extent you performed services in California from the grant date to the exercise date. Any capital gain had a source in your state of residence when you sold the stock.

Example:

On February 1, 2022, your employer granted you options under an employee stock purchase plan. On February 1, 2022, you exercised these options. From the grant to the exercise, you were a California resident and performed 50 percent of your services in California. On June 1, 2022, you permanently moved to Nevada, and on January 15, 2013, you sold the stock at a gain.

Because you sold the stock before meeting the one-year holding period requirement, the difference between the stock’s fair market value on the date of exercise and the option price is taxable as wages. Since you performed 50 percent of your services in California from the grant date to the exercise date, 50 percent of the wage income would be taxable by California. Any capital gain resulting from the increase in value over the fair market value on the exercise date would have a source in Nevada, your state of residence when you sold the stock.

On top of the taxation discussion above, our clients always have questions about residency determination as CA taxes full-time residency worldwide. Also, you should contact your employer to adjust your home state residency record. There are other ways to allocate the income on the tax returns manually, but it may trigger an IRS audit in the future. Due to the complexity of the paper record and the higher IRS audit possibility, we always recommend our client schedule a consultation with us.

Click to Download: California Equity-Based Compensation Summary Table

For questions and request to write on specific topics, please email support@flextcg.com.
For partnership and collaboration, please email info@flextcg.com.

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1. Tenants who can’t pay the rent.
2. Tax losses they can’t deduct.

We’ll start with the tenants and then move on to the rental property tax-loss issues.

For the first time in U.S. history, residential landlords are subject to a sweeping nationwide federal moratorium on evictions for nonpayment of rent through the end of 2020.

There is no moratorium on landlords’ responsibility to pay their bills. Thus, landlords need to prepare for some of the rockiest times in decades.

The Federal Moratorium on Residential Evictions

The Centers for Disease Control and Prevention (CDC) and the Department of Health & Human Services issued the latest federal moratorium on evictions. It is an emergency health measure intended to help prevent the spread of COVID-19.

The CDC order is effective September 4, 2020, through December 31, 2020. The order replaces an eviction moratorium put in place on March 27, 2020, by the Coronavirus Aid, Relief, and Economic Security (CARES) Act that expired July 24, 2020.

The CDC order generally bars residential landlords from evicting tenants for nonpayment of rent if a tenant’s estimated 2020 income is no more than $99,000 (single) or $198,000 (married, filing jointly).

Unlike the CARES Act moratorium, which applied only to multifamily rental properties with rental subsidies or federally backed mortgages, the CDC order applies to all types of residential rentals: houses, duplexes, apartment buildings, mobile homes, and mobile home spaces. There is no requirement that the rental be federally financed or rent subsidized.

The CDC order does not apply to commercial properties, including motels and hotels. Nor does it apply to guesthouses rented to temporary guests or seasonal tenants—this presumably excludes most Airbnb and similar short-term rentals.

To prevent an eviction, a tenant need only give the landlord a declaration signed under penalty of perjury providing that the tenant

• has used his or her best efforts to obtain all available government assistance for rent or housing;
• falls within the income restrictions ($99,000 or $198,000 in income for 2020);
• is unable to pay the full rent due to substantial loss of household income, loss of work or wages, or extraordinary out-of-pocket medical expenses;
• is using his or her best efforts to make partial payments that are as close to the full rental payments as the tenant’s circumstances permit; and
• would likely become homeless or forced to move into and live in close quarters or a shared living space.

Tenants need not provide their landlord with any proof that the statements in the declaration are true. The CDC has created a form declaration for tenants to use.

There is no time limit on when tenants must provide this declaration to their landlord—they can do so anytime before or after receiving a termination notice.

Individual landlords who violate the CDC order are subject to a fine of up to $100,000 and up to one year in jail, if the violation does not result in a death.

The fine goes up to $250,000 if the violation results in a death (it’s unclear how the government could prove an eviction caused a tenant’s death).

The fines are doubled for organizations such as LLCs, corporations, and REITs.

Help Tenants Get Help

The CDC order requires tenants to seek government aid to help pay their rent. But they need not seek help from nongovernment sources such as churches or private charities.

It is to your advantage to help your tenants obtain such aid. After all, you would like the rent to get paid. And you likely would want to keep the tenant—assuming this is a good tenant. Links to government programs providing financial assistance for renters are available at https://legalfaq.org.

Work Out a Payment Plan

Try to work out payment plans with struggling tenants. This is in their best interests as well as your own. Be sure to get the terms in writing.

For example, if a tenant’s income has declined by 20 percent, you could agree to accept a 20 percent rent reduction through the end of the year and require the tenant to pay the balance due over 2021. Make it clear that this is a partial rent payment and does not satisfy the tenant’s full rental obligation.

You are under no obligation to offer a tenant a permanent rent reduction or any form of rent forgiveness.

And keep in mind that your government is not going to reward your generosity. You get no tax deduction or other tax benefit for reducing or forgiving rent. This doesn’t mean you shouldn’t do it. Just don’t expect the tax code to reward your generosity.

Unpaid Rent Is Not Tax-Deductible

Bad news. Unpaid rent is not a tax-deductible rental expense. Rather, it is a debt owed to you by your tenant. You get no tax deduction for the unpaid rent even if tenants never pay the rent they owe.

Good news. On the plus side, unpaid rent is not taxable as income, is not reported on your tax return, and increases the chances that you will have a rental property tax loss (deductible, we hope). This assumes you are a cash-basis taxpayer, as virtually all residential landlords are.

Deducting Rental Property Tax Losses

You have a rental loss if the total annual expenses you incur for your rentals (mortgage interest, taxes, utilities, insurance, maintenance, depreciation, and other expenses) exceed your total rental income (which does not include unpaid rent).

It’s likely that many landlords who ordinarily have profitable rentals will suffer rental losses for 2020 because their tenants failed to pay all or part of their rent.

The dreaded passive activity loss rules prevent many landlords from deducting all or part of their rental losses from their non-rental income.

Rental losses are always classified as passive losses. Subject to two important exceptions, the general rules are as follows:

• Passive losses are deductible only from passive income—income from rental activities and from businesses in which you do not materially participate.
• Passive losses are not deductible either (a) from ordinary income such as salary and self-employment earnings, or (b) from investment income such as dividends or interest.

Exception 1. $25,000 Allowance for Rental Real Estate

The tax law takes pity on landlords with a relatively modest income and permits them to deduct a limited amount of rental losses from non-rental income.

If your modified adjusted gross income for the year is under $100,000, you may deduct up to $25,000 in total annual rental losses from your nonpassive income, provided that you actively participate in the management of your rentals (an easy standard to meet).

Exception 2. Real Estate Professional Exemption from Passive Loss Rules

There’s another way you may be able to deduct your rental losses from non-rental income no matter how high your income: the real estate professional exemption from the passive loss rules.

If you qualify as a tax law–defined real estate professional and materially participate in your rental activity, you may treat rental losses as nonpassive and deduct them from all other nonpassive income without limit for 2020.

Either you or your spouse will qualify as a real estate professional for the year if one of you spends

• more than half your personal service work time in real property trades or businesses in which you materially participate, and
• more than 750 hours of your personal service work and investment analysis time in real property trades or businesses in which you and/or your spouse materially participate.

In addition to the standard described above, you and/or your spouse must materially participate in a rental activity to enable the tax loss deduction against your other income. There are various methods for establishing material participation. The two most common are working more than 500 hours in a tax law–grouped multi-rental activity and working more than 100 hours more than anyone else on individual non-grouped properties.

People with a full-time job outside the tax law–defined real estate industry can rarely qualify as real estate professionals.

Non-deductible Rental Losses Become Suspended Passive Losses

You don’t lose rental losses you can’t deduct because of the passive loss rules. Instead, the losses become suspended passive losses. They are carried forward indefinitely and deducted from passive income each year until they are used up.

You may also deduct your suspended passive losses if you sell or otherwise dispose of substantially all your interest in your rental property in a taxable transaction.

To be better understand the Government to landlords’ detailed information. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

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Nonprofits

The nonprofit organization is a charitable entity with specific social goals that uses its income and surplus to fund operations, rather than benefiting members, shareholders, employees, or leaders of the organization. The remaining profit is further used to achieve its goals. Nonprofit organizations accept donations from governments, foundations, institutions, and individuals, to name a few. These funds are then used for the charity work set. They can conduct activities in research, religious, educational, and even scientific environments and are tax-free.

Foundations

A foundation is an organization that does not qualify as a public charity. They are very similar to nonprofit organizations, except that the funds for foundations usually come from family or corporate entities. In contrast, the funds for nonprofit organizations generally come from their income.

Technically speaking, donations can be made to private foundations, but many foundations do not accept it. As an alternative, they use the funds initially used for investment and allocate the funds generated from these investments. The foundation will also donate these funds to other nonprofit organizations in the form of gifts or grants.

Private foundations have the following subsets: operational and non-operational. Private non-operating foundations donate to other charitable organizations, which is a more common form. The foundation also does not directly execute charitable programs or services. Privately operated foundations allocate funds to their own projects that exist for charitable purposes.

Summary of Nonprofit VS. Foundation

A nonprofit organization refers to a charitable organization with specific social goals that use its income and surplus to fund operations, rather than benefiting members, shareholders, employees, or leaders. They receive funds from governments, foundations, institutions, and individuals, and do not donate to other charities. On the other hand, a foundation refers to a charitable organization that raises funds from its founder. It can be a corporate entity or a family. They can get funds from private foundations, companies, governments, individuals, companies, or families. However, both of them play a significant charitable role in society.

To be better understand the difference between a non-profit organization and a private foundation. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

The post What is the difference between a nonprofit and foundation? appeared first on Flex Tax and Consulting Group (FTCG).

Non-resident foreigners can also apply this exclusion. However, because non-resident aliens are not eligible to submit a joint return, each person designated as a non-resident alien needs to share its share of the national resident exclusion tax in a separate tax return. In practice, this means that if the sale proceeds exceed $250,000, each filer will need to 1) be eligible to apply for the exemption of the primary residence on their own, and 2) file Form 1040NR U.S. Nonresident Alien Income Tax Return and state the ownership share of the principal residence.

According to the ” Foreign Investment in Real Property Tax Act ” (“FIRPTA”), non-resident foreigners should also pay additional tax other. For primary residences where the realized amount of sale (usually the sale price) is less than $300,000, no withholding is required; for sales between $300,000 and $1,000,000, the withholding tax rate is 10%; if the sales exceed $1,000,000, The withholding rate is 15%. Non-resident foreign taxpayers may find themselves eligible to claim the exclusion of the primary residence stipulated in IRC § 121, so FIRPTA withholding taxes will exceed his/her highest tax liability in the transaction. In this case, the taxpayer can request the US Internal Revenue Service to provide proof of withholding tax to the buyer, indicating that the withholding tax rate they owe is low or not at all. Since the primary residence exclusion in IRC § 121 does not constitute a non-recognition provision within the meaning of FIRPTA (non-recognition provision makes FIRPTA not applicable at all), unless the purchaser obtains a withholding certificate, the buyer must withhold the appropriate tax rate.

Tax treatment for gain from sale of principal residence can be tricky. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

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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).

Over the past few months, I’ve been surprised to find that very few angel investors and entrepreneurs are aware of one of the most important developments for startups in a long time. If you are an angel investor or a founder make sure you read this article carefully as it could save you millions.

Recently Congress extended Section 1202 of the Internal Revenue Code, providing significant tax benefits to angel investors and entrepreneurs. Section 1202 tax exclusion provides tax-free gains on 100% of gains related to startup investments, up to $10 million per investment. This provision enables entrepreneurs to exclude up to $10 million of gains as well. A version of this provision has been around for years but previously it was not a permanent exemption. The exemption was less than 100% during certain years and it was generally less straightforward.

The 1202 tax exclusion should make angel investing more attractive than ever before and also provides a major benefit to entrepreneurs. Just make sure you understand the details:

Section 1202 Basics

• 100% tax break for gains made on investments in qualified small business stock (startups or small businesses).
• Maximum exclusion equals the greater of $10 million or ten times the initial investment (technically the adjusted tax basis).
• Alternative Minimum Tax does not apply.
• Companies must be properly incorporated in adherence to Section 1202.
• Founders, employees, angel investors, fund general partners, and taxable limited partners are all eligible for the tax break.

Example of Impact on Entrepreneurs

A company is acquired for $50 million and the founder owns 20% of the company at exit. The founder would receive $10 million before taxes and would have $10 million of gains.

If the company took advantage of the 1202 tax exclusion, he/she could exclude the entire $10 million of gains from taxes.

Example of Impact on Angel Investors

Another company gets acquired for $500 million and an angel investor who invested $100,000 early on now owns 2.5% of the company at exit. The angel investor would receive $12.5 million at the exit and would have a $12.4 million gain ($12.5 million of proceeds less original investment of $100,000).

As long as the company took advantage of the 1202 tax exclusion. The angel investor could exclude $10 million from taxes and would just get taxed on the remaining $2.4 million.

Section 1202 Requirements

• Investment must be hold for at least five years.
• The company must be incorporat as a C Corporation in adherence to Section 1202.
• The company must have no more than $50 million in assets before the investment or immediately afterward.
• Businesses may not be in the service, finance, farming, mining, extraction, restaurant, hospitality, or real estate industries.
• Corporations that make investments are not eligible.

This development should give more credence to the argument for C-Corporation vs. LLCs and likely overrides my prior argument for LLCs. If you are a founder, you might be able to take advantage of this exemption even if you weren’t aware of it upon incorporation. Talk to Flex Tax and Consulting Group. If you are an angel investor, make sure any startup you are investing in is aware of the 1202 tax exemption. It makes the proper elections to comply if they qualify.

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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).

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!

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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.

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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.

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There are many reasons to have an up-to-date business valuation. For example:

• You may need to sell the business due to retirement, health, divorce, or family reasons.
• You may need debt or equity financing for expansion or due to cash flow problems. Potential financiers or investors will want to see that the business has sufficient worth.
• You may be adding shareholders (or one or more shareholders may wish a buyout). In this case, the share value will need to determine.

Notes: Regardless of the reason, how much your business is worth depends on many factors. From the current state of the economy through your business’s balance sheet.

If for example, similar businesses in your area have recently sold. The value of your business will determine in large part by the selling price of the previous sales.

Get It Done Right

Business owners should not do their business valuation. This is too much like asking a mother how talented her child is. Neither the business owner nor the mother has the necessary distance to step back and answer the question objectively.

So to ensure that you set and get the best price when you’re selling a business, get a business valuation done by a professional. For instance, a Chartered Business Valuator (CBV). In the U.S., you can find Business Valuators through the website of the American Society of Appraisers (ASA). While in Canada you can find them through the Canadian Institute of Chartered Business Valuators.

A Business Valuator (or anyone vaulting your business such as an accountant) will use a variety of business valuation methods to determine a fair price for your business.

Three Business Valuation Methods

Asset-Based Approaches

These business valuation methods total up all the investments in the business. Asset-based business valuations can do on a going concern or a liquidation basis.

• A going concern asset-based approach lists the business’s net balance sheet value of its assets and subtracts the value of its liabilities.
• A liquidation asset-based approach determines the net cash that would received if all assets sell and liabilities pay off.

Using the asset-based approach to value a sole proprietorship is more difficult. In a corporation, all assets owned by the company and would normally included in the sale of the business. Assets in a sole proprietorship exist in the name of the owner and separating assets from business and personal use can be difficult.

For instance, a sole proprietor in a lawn care business may use various pieces of lawn care equipment for both business and personal use. A potential purchaser of the business would need to sort out which assets the owner intends to sell as part of the business.

Earning Value Approaches

These business valuation methods predicated on the idea. A business’s true value lies in its ability to produce wealth in the future. The most common earning value approach is Capitalizing Past earnings.

With this approach, a valuator determines an expected level of cash flow for the company using a company’s record of past earnings. Normalizing them for unusual revenue or expenses, and multiplies the expected normalized cash flows by a capitalization factor. The capitalization factor is a reflection of what rate of return a reasonable purchaser would expect on the investment. As well as a measure of the risk that the expected earnings will not achieve.

Discounted Future Earnings is another earning value approach to business valuation where instead of an average of past earnings, an average of the trend of predicted future earnings used and divided by the capitalization factor.

Any valuation of a service-oriented sole proprietorship needs to involve an estimate of the percentage of business that might be lost under a change of ownership.

Note that this can be mitigated in many cases, such as when a trusted family member (who may already be familiar with the client list) takes over the business.

Market Value Approaches

Market value approaches to business valuation attempt to establish the value of your business by comparing your business to similar businesses that have recently sold. This method is only going to work well if there are a sufficient number of similar businesses to compare.

Assigning a value to a sole proprietorship based on market value is particularly difficult. By definition, sole proprietorships are individually owned so attempting to find public information on prior sales of like businesses is not an easy task.

Although the Earning Value Approach is the most popular business valuation method, for most businesses, some combination of business valuation methods will be the fairest way to set a selling price.

Non-Competition Clauses Can Affect Valuation

Non-competition clauses frequently included in agreements for the sale of a business, particularly in cases where goodwill forms a significant part of the valuation. No one wants to purchase a business on the assumption that current customers will continue to patronize the business only to have the previous owner immediately join a competitor or open a similar business in the same area.

Non-competition clauses typically contain restrictions such as:

• Forbidding the seller from opening up a competing business in the same geographical area
• Attaching a time limit to competing for activity. For example, the buyer may request that the seller not engage in direct competition for five years

Non-competition agreements can be a thorny legal issue and are often the subject of court cases between buyers and sellers after a business is sold. From a legal standpoint, to be enforceable the restrictions placed in a non-competition clause must be clearly define and ‘reasonable’. Non-competition covenants can be nullify by the courts if it determined that enforcement places overly broad. Or unreasonable restrictions on the seller’s ability to continue his/her trade and earn a living. Non-competition clauses should review by the legal representatives of the buyer and seller before the sale of the business.

What About Franchise Businesses?

Franchise agreements generally define how a franchise can sell, and these vary by franchise vendor check your franchise contract. Some contracts stipulate that the franchisors will buy back your franchise directly for a fixed price. Others assist with valuation and locating a buyer, as it is in their best interest to make sure that the business continues uninterrupted.

The Best Choice May Be a Combination

Although the Earning Value Approach is the most popular business valuation method, for most businesses. Some combination of business valuation methods will be the fairest way to set a selling price. The first step is to hire a professional Business Valuator. He or she will be able to advise you on the best method. Or methods to use to set your price so you can successfully sell your business. If you have any question, please don’t be hesitate to contact Flex Tax and Consulting Group 

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