Do you know the 5 Year plus One Day Rule ?

For homeowners, this tax law rule is critical for you to understand. Why ?…..well, just about everyone knows that when you sell your primary residence, you are entitled to exclude the first $250K/$500K of gain, depending on whether you file your taxes as a single taxpayer or Married Filing Joint.  There, of course, is a mathematical calculation you must complete ( and a Form to file with your personal income tax return.

https://www.irs.gov/publications/p523/index.html

What most of us do not know is that we can receive this capital gain exclusion again, and again, and again, as long as we abide by the 5 years plus 1-day rule. This rule essentially states that, as long as you lived in your primary residence for two (any two) of the last five years, you can again utilize this wonderful tax benefit.

On the opposite side,  losses resulting from the sale of your primary residence are not deductible, and if you meet a portion of the 5 years plus 1-day rule, you are eligible to receive a pro-rata share of the exclusion. Working with an expert Tax Accounting firm like Core Performance is the ideal way to ensure you achieve the maximum benefit from the tax code. Let us know how we can assist you? we are truly here to help in any way we can. http://coreperformance.net/contact/

When the old rules don’t apply, who is making the new ones?

August 10, 2017 · Posted in Uncategorized · Comment 

When the old rules don’t apply, who is making the new ones?…Today, more so than yesterday, and less than tomorrow, the ground below us is shifting. We need to ask better questions in order to get better answers. How do you do that? It really helps to see the forest from the trees, and then back again. Our economy is evolving much faster than our human brains and emotional make-up can accommodate. Now, we need to thing much more deeply, and with more reflection on the implications of these seismic shifts in the Economy. There will always be winners and losers. The key is to be a winner, and to know what it takes to overcome the obstacles on the pathway to success, or failure. Stay tuned for more intuition and datapoints on how to develop your own pathway to success. Stay tuned!, there is much more to come.

https://unsplash.com/photos/BwgKUh9tN84

Hello People – Important Consideration – Did you Receive a raise or are you expecting one?

Here are some important reminders as you think about compensation, tax planning, savings and retirement planning.

The amount of tax withheld from your paycheck should increase automatically along with your higher income. But if you’re working two jobs, have significant outside income (from investments or self-employment), or you and your spouse file a joint tax return, the raise could push you into a higher tax bracket that may not be accounted for in the Form W-4 on file with your employer. Even if you aren’t getting a raise, ensuring that your withholding lines up closely with your anticipated tax liability is smart tax planning. Use the IRS Withholding Calculator; then, if necessary, tell your employer you’d like to adjust your W-4. We can help you navigate through this process if you prefer guidance.

Another thing to consider is using some of the additional income from your raise to increase your contribution to a 401(k) or similar qualified retirement plan. That way, you’re reducing your taxable income and saving more for retirement at the same time. Please contact us at peterc@coreperformance.net to review or discuss and we will get back to you promptly. Here’s hoping you have an awesome summer.

What’s better for Tax & Investment Purposes? Election of a Partnership or an S-Corp?

April 3, 2017 · Posted in Accounting, Profitability Tips, Tax Planning · Comment 

Let’s get QuizziCAL: LLCs and Partnerships

Here’s a stumper for our tax experts!

Your client Esteban, a chef of growing acclaim, recently left New York because he couldn’t stand the thought of a burrito being classified as a sandwich and was forced to pay sales tax on his most notable creation, the Spicy Mayan Lobster Burrito con Mojo. He came to California to be a part of the wildly expanding culinary scene in Los Angeles and plans to open his own restaurant at Row DTLA, an exciting and massive complex in the downtown Arts District. In the meantime, he has met Siouxzi, a creative mixologist who makes an astonishing cranberry lime margarita. The two want to form a business.

Esteban and Siouxzi are trying to decide whether to form as an S corporation or an LLC. They plan to invest $25,000 each, and they believe they will operate at a $75,000 loss per year for the first two years. To cover the losses, the business will have a $100,000 line of credit, which they both must personally guarantee. Under which business structure will Esteban and Siouxzi be able to deduct all of the losses?

Answer:

The should form an LLC, because they will be able to include the loan guarantee as part of their basis; whereas the S corporation basis is limited to their contributions and loans they personally make to the business. For more information,

Doing away with Self-Employment Taxes – What should you do ? follow @thinkimaginebig

March 20, 2017 · Posted in Uncategorized · Comment 

If you own a profitable, unincorporated business with your spouse, you’re probably fed up with high self-employment (SE) tax bills.

Self-Employment Tax Basics

For 2016, the maximum 15.3% self-employment (SE) tax rate hits the first $118,500 of net SE income. For 2017, the 15.3% rate hits the first $127,200 of net SE income. It includes 12.4% for the Social Security tax component and 2.9% for the Medicare tax component.

Above the Social Security tax ceiling, the Social Security tax component goes away, but the Medicare tax component continues at a 2.9% rate before rising to 3.8% at higher income levels.

If you have an unincorporated small business in which both you and your spouse participate, you may have been treating it as a 50/50 spouse-owned partnership or as a spouse-owned LLC that’s treated as a 50/50 partnership for tax purposes. The more profitable your business is, the more you’re paying in SE tax bills. That’s because you and your spouse must separately calculate your respective SE tax bills. For 2017, that means you will each pay the maximum 15.3% SE tax rate on the first $127,200 of your respective shares of net SE income from the business.

An unincorporated business in which both spouses are active is typically treated as a partnership that’s owned 50/50 by the spouses — or a limited liability company (LLC) that’s treated as a partnership for tax purposes and owned 50/50 by the spouses. In either case, you and your spouse must separately calculate your respective SE tax bills.

For 2017, that means you’ll each pay the maximum 15.3% SE tax rate on the first $127,200 of your respective shares of net SE income from the business. (See “Self-Employment Tax Basics” at right.) Those bills can mount up if your business is profitable. Here are three ways spouse-owned businesses can lower their combined SE tax hit.

  1. Establish that You Don’t Have a Spouse-Owned Partnership (or LLC)

To illustrate the adverse tax consequences of operating a spouse-owned partnership, suppose you expect your business to generate $250,000 of net SE income in 2017. You and your spouse must separately calculate SE tax. So each of you will owe $19,125 ($125,000 x 15.3%), for a combined total of $38,250. To make matters worse, your SE tax bill is likely to increase every year due to inflation adjustments to the Social Security tax ceiling and the growth of your business.

These adverse effects apply only if you have a business that is properly treated as a 50/50 spouse-owned partnership or a spouse-owned LLC that’s properly treated as a 50/50 partnership for federal tax purposes.

Several IRS publications attempt to create the impression that involvement by both spouses in an unincorporated business automatically creates a partnership for federal tax purposes. For example, the Tax Guide for Small Business says, “If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement.”

However, in many cases, the IRS will have a tough time making the argument that a business is a 50/50 spouse-owned partnership (or LLC). Consider the following quote from an IRS private letter ruling: “Whether parties have formed a joint venture is a question of fact to be determined by reference to the same principles that govern the question of whether persons have formed a partnership which is to be accorded recognition for tax purposes. Therefore, while all circumstances are to be considered, the essential question is whether the parties intended to, and did, in fact, join together for the present conduct of an undertaking or enterprise.”

The IRS private letter ruling identifies these factors, none of which is conclusive, as evidence of this intent:

    • The agreement of the parties and their conduct in executing its terms,

 

    • The contributions, if any, that each party makes to the venture,

 

    • Control over the income and capital of the venture and the right to make withdrawals,

 

    • Whether the parties are co-proprietors who share in net profits and who have an obligation to share losses, and

 

  • Whether the business was conducted in the joint names of the parties and was represented to be a partnership.

In many situations where both spouses have some involvement in an activity that has been treated as a sole proprietorship or in an activity that has been operated as a single-member LLC (SMLLC) that has been treated as a sole proprietorship for tax purposes, only some of the factors listed in the private letter ruling are present. Therefore, the IRS may not necessarily succeed in arguing that the business is a spouse-owned partnership (or LLC).

That argument may be especially weak when:

    • The spouses have no discernible partnership agreement, and

 

  • The business hasn’t been represented as a partnership to third parties, such as banks and customers.

If your business can more properly be characterized as a sole proprietorship or as an SMLLC that is treated as a sole proprietorship for tax purposes, only the spouse who is considered the proprietor owes SE tax.

Let’s assume the same facts as in the previous example, except that you take a supportable position that your business is a sole proprietorship operated by one spouse. Now you have to calculate SE tax for only that spouse. For 2017, the SE tax bill would be $23,023 [($127,200 x 15.3%) + ($122,800 x 2.9%)]. That’s much less than the combined SE tax bill from the first example ($38,250).

  1. Establish That You Don’t Have a 50/50 Spouse-Owned Partnership (or LLC)

Not all businesses are owned 50/50 by their owners. Say your business can more properly be characterized as a partnership (or LLC) that’s owned 80% by one spouse and 20% by the other spouse, because one spouse does much more work than the other.

This time, let’s assume the same facts as in the previous example, except that you take a supportable position that your business is an 80/20 spouse-owned partnership (or LLC). In this scenario, the 80% spouse has net SE income of $200,000, and the 20% spouse has net SE income of $50,000.

For 2017, the SE tax bill for the 80% spouse would be $21,573 [($127,200 x 15.3%) + ($72,800 x 2.9%)], and the SE tax bill for the 20% spouse would be $7,650 ($50,000 x 15.3%). The combined total SE tax bill is $29,223 ($21,573 + $7,650), which is significantly lower than the total from the first example ($38,250).

  1. Liquidate Spouse-Owned Partnership and Hire One Spouse as an Employee

This strategy is a little more complicated than the previous strategies. First, you’ll need to dissolve your existing spouse-owned partnership or spouse-owned LLC that’s treated as a partnership for federal tax purposes, and start running the operation as a sole proprietorship or SMLLC treated as a sole proprietorship for federal tax purposes. Even if the partnership (or LLC) owns assets and has liabilities, this step is generally a tax-free liquidation under the partnership tax rules.

The second step is to hire one spouse as an employee of the new proprietorship (SMLLC). Pay that spouse a modest cash salary, and withhold 7.65% from the salary checks to cover the employee-spouse’s share of Social Security and Medicare taxes. As the employer, the proprietorship must pay another 7.65% directly to the government to cover the employer’s half of Social Security and Medicare taxes. However, since the employee-spouse’s salary is modest, the Social Security and Medicare tax hits will also be modest.

The third step is to consider setting up a Section 105 medical expense reimbursement plan for the employee-spouse. Use the plan to cover your family’s out-of-pocket medical expenses, including health insurance premiums, by making reimbursement payments to the employee-spouse out of the proprietorship’s business checking account. Deduct the plan reimbursements as a business expense of the proprietorship. On the employee-spouse’s side of the deal, the plan reimbursements are free of federal income, Social Security and Medicare taxes because the plan is considered a tax-free fringe benefit.

The fourth step is to deduct, on the sole proprietorship’s (SMLLC’s) tax schedule, the medical expense plan reimbursements, the employee-spouse’s cash salary, and the employer’s share of Social Security and Medicare taxes. These deductions also reduce the proprietor’s net SE income and the SE tax bill for the business.

Finally, you’ll need to calculate the SE tax bill for the spouse who is treated as the proprietor. This minimizes the SE tax hit, because the maximum 15.3% SE tax rate applies to no more than $127,200 of SE income (for 2017), vs. up to $254,400 if you continue to treat your business as a 50/50 spouse-owned partnership (or LLC).

Important note: If you have employees other than the spouse, your business may have to cover them under a Section 105 medical expense reimbursement .

 

Contact us at 949 502-4680 to discuss your tax planning strategies! plan.zNN6ubHmruIhttps://unsplash.com/?photo=zNN6ubHmruI

Documenting Improvements to Real Property – Don’t get Screwed!

We often work with Companies constructing improvements to Real Property, including Commercial and Residential Real Estate that they own or lease. As we know,  these additions to the real property are essential in determining your investment in, or basis, in the property.  Down the road, when the Company taxpayer goes to sell the property, maintaining accurate records makes the difference between an optimal capital gain or loss calculation, and a less than optimal. We all know about the difference between these two.

Our clients rely on us to document to the California Board of Equalization (BOE), in order to establish the personal income tax adjusted basis of real property sold by them, based on information provided by the taxpayers’ external accountants, who tracked all costs and expenses of construction on the property and maintained bank and other financial records, receipts, and information.

When our clients rely on us to maintain the construction accoutning, the BOE always finds that the information compiled and provided by us, our client’s Accountants, was the most reliable.  The BOE notes that the evidence submitted by the Accountants  reflected amounts for capitalized construction loan interest and capitalized mortgage interest included in the adjusted basis reported by the taxpayers. Those amounts were tracked meticulously on a detailed schedule that reflected the exact amounts of interest that were paid and whether the taxpayers had claimed those mortgage interest payments as current year deductions or had capitalized those amounts. So, we do go the extra mile. We do provide exactly what is needed to support and defend our Client’s interests. So, contact us for your Real Estate Project. We’re Real Estate Experts, and we know exactly what the BOE, the IRS and the FTB is requiring. You’ll be so thankful, and so will we.

Happy New Year’s 2017 to all our Readers – here’s some valuable details for you to Digest!

December 28, 2016 · Posted in Accounting, Decision-Making Tips, Profitability Tips, Tax Planning · Comment 

Here are the most essential updated limits for 2017; as we have identified for our Business Owner and Family clients.

Social Security maximum wage base for 2017 increased to $127,200. Amounts withheld at the 6.2% rate from an employee will now be $7,886.40 with the employer matching it. A self-employed person will pay the employee’s and employer’s shares which will be almost $15,772.80. The 1.45% Medicare tax is in addition to this and there is no salary cap on that. The employer will match employee’s amount and the self-employed will pay both shares. The employee’s total withholding tax will be7.65% and self-employed will be 15.3% on amounts up to the wage base and 1.45% and 2.9% on amount over that.

Capital Gains: Maximum rate is 20% plus 3.8% if the Net Investment Income Tax applies. The 0% rate will apply to extent ordinary income is taxed at a rate below 25%. A 15% rate is for individuals taxed at a 25% ordinary income tax rate or higher but below the 39.6% rate. The rate is 25% for unrecaptured Section 1250 depreciation; and 28% for long term sales of collectibles.

Alternative Minimum Tax exemption for those married filing jointly will be $84,500 and for singles $54,300. The exemption starts to phase out when joint and single income exceeds $160,900 and $120,700.

Personal exemption is $4,050 and starts to phase out when joint and single AGI reaches $313,800 and $259,400.

Section 179 Depreciation: $510,000 with this amount being reduced when the cost of qualifying property exceeds $2,030,000.

Gift Tax Annual Exclusion: $14,000 per person receiving a gift. This is doubled if there is a consenting spouse.

Estate and Gift Tax Lifetime Exemption: $5,490,000. For gifts this is doubled if there is a consenting spouse.

IRA contribution limit is $5,500 and an extra $1,000 for those who are age 50 and over. The limits apply for both traditional and Roth IRAs. There are phase outs for traditional IRAs for taxpayers covered by an employer plan; and for Roth IRAs based on AGI.

401k, 403b and most 457 plan contribution limits: $18,000 plus $6.000 for taxpayers past their 50th birthday.

Defined contribution limits: $54,000 plus $6,000 for those past their 50th birthday. SEP plans are not eligible for the over age 50 additional contributions.

Solo 401k plan combined with a SEP: $54,000 plus $6,000 for those past their 50th birthday.

SIMPLE plan limits are $12,500. The extra over age 50 amount is $3,000.

Medicare Part B premiums for those over age 65: Joint Modified AGI up to $170,000, $134.00 per month; MAGI over $170,000 up to $214,000, $187.50; MAGI over $214,000 up to $320,000, $267.00; MAGI over $320,000 up to $428,000, $348.30; MAGI over $428,000, $428.60. The single limits are half of the joint MAGI amounts for the premiums shown. These amounts will be reduced somewhat if you have the Medicare premiums deducted from your monthly Social Security benefits. Tip: These payments are deductible as medical insurance premiums which is especially beneficial for self-employed taxpayers. The Modified AGI reported on your 2015 tax return determines your 2017 premiums. To reduce your MAGI for 2017 (almost too late for 2016) consider transferring part or all of your 2017 Required Minimum Distributions (up to $100,000) directly to a charity. This might help reduce your 2019 premiums. You should consult with a tax advisor for other strategies to reduce MAGI. Starting early in the year will give you the best opportunities for tax planning.

Retirement plan tip: Consider making your 2017 contributions in January 2017 or as early in the year as you could so the tax deferred earnings start. Also, some plan contributions for 2016 can be made in 2017 and some of the plans can be opened in 2017 for the 2016 tax year. Further, do not overlook IRA contributions for non-working spouses. Self-employed people with no employees should consider a solo 401k combined with a SEP – if you qualify for 2016, open it ASAP! This must be done before Dec 31, 2016.

There are other items but these cover the most items we get questions about. All of these amounts and limits should be checked for amount and applicability with our office as your tax advisor.

What does it mean for Real Estate Investors “To do Business in California”?

The State of California, by legislation, incorporates the following activities, as sufficient to require registration in California, with the Secretary of State office (http://www.sos.ca.gov/business-programs/business-entities/faqs#form).

  1. Does your business conduct regular and continuous activities in the State of CA? ……… as an example, do you fix and flip houses ? do you wholesale houses? How about Property Management?
  2. Do you have employees who live and work in CA? do you have independent contractors working on your projects?
  3. Do you need to conduct litigation against another business in the State of CA regarding your business activities?

So, the net result, is that if you are active in any of the above items, you are required to register in the State of CA, and also to pay income and/or franchise tax to the State of CA for California’s share of your revenues.

We want to help you structure your entities in such a way to minimize franchise taxes. We want to assist with planning your business process to help you address the following important issues:

  1. Structuring your Franchise Taxes appropriately (minimum $800 per year per entity)
  2. Ensure strong outside charging order protection – shelter your assets from charging orders due to liability concerns
  3. Consider the usage of a Holding LLC as nominee Manager for the active LLC
  4. Too many damn attorneys in the State of CA  – make yourself appear worthless to the outside world, and to the Government
  5. Income Taxes in the State of CA – do I have to pay CA taxes on income generated outside the State of CA ?

What about Activities that do not qualify for the doing business in CA?

  1. Owning Real Estate
  2. Maintain a trading account, and you are an active trader
  3. Private money lending, where you make the loan (c0nsidered the activity) outside of the State of CA, meaning the borrower and the property is outside of CA.

We’re experts in this field – why not work with our legal and tax team to coordinate a plan consistent with your goals. You should work with experts to secure your investments. Please open, review and complete this form, ( https://docs.google.com/forms/d/1epIax5YfvecdZmLg-cpq9MdYkH5kBnkAd83hqcshjlE/edit) and we will follow up with you to schedule your complimentary 30 minute interview. Or, just call us at (949) 502-4680 and we can talk.

For our Business Clients – let’s keep an open eye on these new Regulations

Now that the October  tax deadlines have come and gone, here are some of the biggest changes to keep an eye on as we all wrap up the 2016 year, and head into 2017:

FIRST: The Annual Form 1099 just got more difficult.  Some of the biggest tax changes small-business owners will need to pay attention to is in health care coverage. For starters, businesses that are subject to the health care mandate expands in 2016. Now, not only must companies with 100 or more full-time employees provide coverage, but smaller businesses that employ 50-99 workers must do so as well.

SECOND: While small businesses may have come into contact with this requirement in early 2016, the rule’s relative newness bears a reminder: All employees will need to fill out Form 1095-B, Health Coverage, and employers will need to send these forms to the IRS. These are by no means the only changes to how employers report and provide coverage, nor are they likely to be the last as lawmakers continue to refine and tweak Obamacare.

THIRD: On January 1, 2016, a new rule was proposed by the Department of Labor that would raise the salary threshold for overtime to $50,440. That means employees that make at least this amount annually are exempt for overtime regulations. As such, employers do not have to pay them for that extra time. However, following the rule’s announcement, criticism has flooded in from employers and lawmakers, with many voicing concern that $50,440 was too big an increase from the previous threshold of $23,660. Since then, a revised number—$47,000—has been proposed as the new threshold. Once the final rule is published, employers will have 60 days before it becomes law.

Working closely with your accountant or bookkeeper will help companies best prepare and integrate the change into their workplaces. We are here to assist you implement these new rules. Just give us a call.

Use the Federal and State Tax Code to the Best of Your Advantage

Our business is built entirely on advising Entrepreneurs on profit and growth strategies, using accurate accounting and management reporting; and then we show them tax efficient investment plans and strategies to keep their wealth. In order to do this effectively, we structure our relationship with our Clients to meet regularly for review and updating of their plans and strategies so they fit into the present circumstances and goals. A big part of that is year-end timing and income/spending decisions to minimize the impact of taxes over the lifetime of the business. We can help your business succeed in these critical areas. We focus on achieving these goals for our Customers daily, so that when the time comes, we are ready to deliver results that matter to you. Please review our year-end Tax Guide, then drop me at note or place a call so we can set up a time to discuss your specific situation and requirements. You’ll be happy you did this, and your views about Accountants may change as well.

Peter P Cullen

peterc@coreperformance.net

949 478-4795

2016-year-end-tax-planning

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