Deciphering Cryptocurrency Income: What’s Subject to Self-Employment Tax and What’s Not

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26 Sep 2023

Deciphering Cryptocurrency Income: What’s Subject to Self-Employment Tax and What’s Not

Cryptocurrency, often hailed as the future of finance, has not only disrupted traditional financial systems but also introduced a new frontier of income generation. With the rise of digital currencies like Bitcoin and Ethereum, many individuals have ventured into the world of crypto trading, mining, and other activities. However, when it comes to taxation, the treatment of cryptocurrency income is a complex and often misunderstood area.

Understanding Cryptocurrency Income

Cryptocurrency income can take various forms, and it’s essential to distinguish between them to determine their tax implications:

  1. Capital Gains: When you buy and hold cryptocurrencies as investments, any profit you make upon selling them is considered a capital gain. Capital gains can be either short-term (held for less than a year) or long-term (held for more than a year). The tax treatment of capital gains depends on the holding period and your overall income. Capital gains are subject to capital gains tax and are not subject to self-employment tax
  2. Mining Income: Cryptocurrency mining income is more likely to be subjected to self-employment tax. When you mine cryptocurrencies, you are earning income as if you were running a business. The IRS considers this self-employment income because it involves an ongoing effort to earn profits through mining activities.
  3. Trading Income: Active trading of cryptocurrencies, like stock trading, results in ordinary income. This income is subject to regular income tax rates but is not considered self-employment income. Traders are not required to pay self-employment tax on their trading profits.
  4. Staking Rewards: Staking rewards are generally considered income, and depending on the circumstances, they may be subject to self-employment tax. Here are some factors that make staking rewards subject to self-employment tax:
    • Frequency and Regularity: if you engage in staking activities frequently, it may be viewed as an ongoing income-generating effort like running a business.
    • Operational Effort: If you actively participate in the network’s operations, such as verifying transactions, maintaining nodes, or actively managing the staking process, it can be seen as a business activity.
    • Participation in Network Governance: If your staking activities involve voting or participating in network governance decisions, the IRS may view this as active participation in the operation of a block chain network, potentially leading to self-employment tax implications.
    • Structuring of Rewards: If the reward is distributed as regular income for your involvement in network activities, they are more likely to be subject to self-employment tax. If they are structured as passive investment income, they may not be.
    • Type of Cryptocurrency: The specific cryptocurrency being staked can influence the tax treatment. Some have established taxation guidelines, while others may be subject to evolving interpretations by tax authorities.

Compliance and Reporting

Regardless of whether your cryptocurrency income is subject to self-employment tax, it is crucial to maintain accurate records and fulfill your tax obligations. Here are some important steps to ensure compliance:

  1. Record Keeping: Keep detailed records of all cryptocurrency transactions, including dates, amounts, and counterparties involved. This information will be essential when calculating your taxable income and gains.
  2. Report Your Income: Be diligent in reporting all cryptocurrency income on your tax return. Failure to do so can result in penalties and legal consequences.
  3. Consult a Tax Professional: Given the complexity and evolving nature of cryptocurrency taxation, it’s advisable to seek guidance from a tax professional who is well versed in cryptocurrency tax laws.
  4. Pay Estimated Taxes: If you have self-employment income from cryptocurrency activities, you may be required to make quarterly estimated tax payments to cover your income tax and self-employment tax liabilities.
  5. Stay Informed: Cryptocurrency taxation rules are subject to change, so it’s essential to stay informed about any updates or clarifications from tax authorities.

Still feeling uncertain about how to navigate the complexities of cryptocurrency taxation? Don’t worry, we’ve got you covered. Contact Better Accounting today to gain peace of mind and expert guidance from professionals well-versed in cryptocurrency tax regulations. Our team will help you make sense of it all!

Navigating Tax Deductions: Understanding 100% and 50% Meal Expenses

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26 Sep 2023

Navigating Tax Deductions: Understanding 100% and 50% Meal Expenses

When it comes to business expenses, understanding what is and isn’t deductible can be a complex matter. One particularly major area of concern for many business owners and self-employed individuals is meal expenses. The Internal Revenue Service (IRS) provides guidelines on when meal expenses are deductible and at what rate-whether it’s 100% or 50%. In this blog post, we’ll unravel the nuances of meal expense deductions, helping you make informed decisions when it comes to tax time.

100% Deductible Meal Expenses

  1. Business Meetings: Meals incurred while conducting business meetings, whether with clients, suppliers, or employees, are generally 100% deductible. These expenses are seen as necessary for the operation of your business, and therefore, the full cost can be claimed as a deduction. Be sure to keep records of who attended the meeting and the purpose of the gathering.
  2. Employee Meals: Providing meals to employees for the convenience of the employer is also fully deductible. For example, if your employees need to work through lunch or dinner, and you provide meals-on-site, the cost of those meals can be fully deducted.
  3. Special Circumstances: There are some special circumstances where meal expenses may be 100% deductible. For instance, if you have an event open to the public, like a promotional event or a grand opening, and you provide meals to attendees, those expenses may be fully deductible.

50% Deductible Meal Expenses

  1. Business Travel: When you’re traveling for business purposes and incur meal expenses, these are generally 50% deductible. This includes meals while on a business trip, whether domestic or international. Keep detailed records of your travel, including dates, locations, and the business purpose of the trip.
  2. Entertaining Clients: While you can deduct 100% of the cost of the meals related to business meetings, meals that are primarily for entertainment purposes, even if they involve clients or business associates, are usually 50% deductible. This might include taking clients to a sporting event, theater, or a golf outing.
  3. Meals with Colleagues or Networking: Meals with colleagues or networking events where business is not the primary focus are 50% deductible. This category includes meals with coworkers, industry conferences, and business-related seminars where networking is a significant component.
  4. Office Parties and Social Events: If you host an office holiday party or a social event for your employees, the 50% deduction rule applies. However, it’s important to note that these events should be primarily for the benefit of your employees, not clients or business associates.
  5. Meals During Commute: The cost of meals during your daily commute to and from your regular place of business is NOT deductible. This includes your daily coffee or breakfast on the way to work.

Record Keeping and Documentation

Regardless of whether a meal expense is 100% or 50% deductible, proper record-keeping is crucial. The IRS requires detailed documentation to substantiate your deductions in case of an audit. Here are some best practices:

  1. Receipts: Keep all receipts for meal expenses, noting the date, location, amount, and the individuals present. Jot down the business purpose on the receipt if it’s not already included.
  2. Documentation of Business Purpose: Maintain records that clearly state the business purpose of the meal. This could include meeting agendas, itineraries for business trips, or notes about the nature of the business discussion.
  3. Separate Personal and Business Expenses: Ensure that you keep your personal and business meal expenses separate by using a dedicated business credit card or expense account.
  4. Consult a Tax Professional: Given the complexity of tax rules and regulations, it’s advisable to consult a tax professional or accountant to ensure compliance with tax laws.

It is crucial to remain vigilant and well-informed in keeping up with the ever-changing of tax regulations. Meal expenses, with their varying degrees of deductibility, present both opportunities and challenges for all businesses. You want to make the most of available deductions while ensuring compliance with tax laws. Your ability to navigate these intricacies not only impacts your bottom line but also contributes to the overall financial health and sustainability of your business. Remember, you do not have to figure out all of the laws and regulations on your own, our Better Accounting consultants can guide you through the complexities of meal expenses and more!

Navigating SALT Cap Limitations: Workarounds for Pass-Through Entities

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18 Sep 2023

Navigating SALT Cap Limitations: Workarounds for Pass-Through Entities

The Tax Cut and Jobs Act (TCJA) of 2017 introduced significant changes to the U.S. tax landscape, including the imposition of the State and Local Tax (SALT) deduction cap. Under this cap, taxpayers are limited to deducting a maximum of $10,000 in combined state and local taxes on their federal income tax returns. For pass-through entities, such as partnerships, S corporations and sole proprietorships, this limitation can pose challenges. However, there are workarounds available that can help pass-through entities mitigate the impact of the SALT cap.

Understanding the SALT Cap

The SALT cap was introduced as part of the TCJA to limit the amount of state and local taxes that individuals and pass-through entities could deduct on their federal tax returns. This cap was implemented to help offset the revenue reductions resulting from other tax law changes. While it was intended to primarily affect high-income earners, it has implications for a broader range of taxpayers.

For pass-through entities, the SALT cap can be particularly problematic because they pass their income through to their owners, who then report it on their individual tax returns. As a result, the cap’s limitations can directly impact the owners’ ability to deduct state and local taxes paid by the business.

Workarounds for Pass-Through Entities

Pass- through entities have several options to mitigate the impact of the SALT cap. Here are some effective workarounds to consider:

Entity-Level Taxes: Some states have implemented entity-level taxes, allowing pass-through entities to pay taxes at the business level rather than passing the liability to individual owners. These entity-level taxes are not subject to the SALT cap, providing full deduction.

State Credits: Pass-through entities can explore state tax credits that may offset the SALT cap limitations. Some states offer credits for taxes paid at the entity level, effectively reducing the owners’ federal tax liability.

Electing S Corporation Status: S corporations are subject to a different set of tax rules compared to partnerships and sole proprietorships. S corporation shareholders can potentially reduce their taxable income by taking advantage of lower salaries and higher distributions, which may help offset the impact of SALT cap.

Consideration of Other Deductions: Owners of pass-through entities should explore other available deductions, such as the qualified business income deduction (Section 199A deduction), which may help reduce their overall taxable income.

Location Strategy: In some cases, changing the location of a pass-through entity’s operations or its state of incorporation may offer tax benefits that offset the SALT cap limitations. However, this strategy requires careful consideration and planning.

State and Local Tax Planning: Implementing effective state and local tax planning strategies can help reduce the overall tax liability of pass-through entities. This may involve structuring transactions to minimize state and local tax obligations.

Consultation with Tax Professionals: Given the complexity of tax laws and regulations, it’s essential for pass-through entities to work closely with experienced tax professionals who can assess their specific circumstances and provide tailored solutions.

Important Considerations

While these workarounds can be effective in mitigating the impact of the SALT cap, it’s crucial for pass-through entities to carefully consider their individual situations and consult with tax professionals to ensure compliance with federal and state laws. Additionally, state tax laws and regulations can vary significantly, so a one-size-fits-all approach may not be appropriate. As tax laws continue to evolve, staying informed and adaptable is essential to ensure compliance and maximize tax efficiency for pass-through entities and their owners. Contact Better Accounting today to make sure you optimize your tax strategies and minimize the impact of the SALT cap

Decoding Rental Property Basis: Understanding Components and Capitalization of Improvements

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4 Sep 2023

Decoding Rental Property Basis: Understanding Components and Capitalization of Improvements

Investing in rental properties offers a pathway to financial growth and passive income. Yet, success in this realm requires a comprehensive grasp of foundational concepts like basis, which forms the bedrock of your investment journey. In this blog post, we unravel the intricacies of rental property basis, explore what factors are included or excluded from it upon purchase, and delve into the decision-making process for capitalizing versus expensing property improvements.

The Essence of Basis: A Primer

Basis, in the context of rental properties, refers to the total cost of acquiring a property. This encompasses not only the purchase price but also a variety of other expenses incurred during the acquisition process. The sum of these costs lays the foundation upon which various financial calculations are built, making it a fundamental metric for investors.

Included in Basis: Unveiling the Components

When purchasing a rental property, several expenses contribute to the overall basis:

  1. Purchase Price: The most apparent component is the purchase price itself-the amount you pay for the property.
  2. Closing Costs: These include fees associated with the purchase transaction, such as title insurance, legal fees, and title search costs.
  3. Real Estate Commissions: If you utilized a real estate agent’s services, the commission paid to them is factored into the basis.
  4. Legal and Professional Fees: Expenses incurred for legal assistance or other professional services related to the property acquisition contribute to basis.
  5. Cost of Improvements Before Use: Capital expenditures made before placing the property in service, such as significant repairs or renovations, can be added to the basis.

Excluded from Basis: Items to Note

While several costs contribute to basis, certain expenses are not included:

  1. Financing Costs: Expenses related to obtaining a mortgage loan, such as loan application fees or mortgage broker fees, are generally not included in the basis calculation.
  2. Personal Expenses: Any costs unrelated to the property acquisition, such as personal travel or meals, are excluded.3.   Pre-Acquisition Expenses: Costs incurred before actively pursuing the property, like inspection expenses for properties you did not end up buying, are typically not part of the basis.

Navigating Improvements: Capitalization vs. Expense

Once the property is acquired, the decision of whether to capitalize or expense certain improvements can significantly impact your basis and overall tax strategy. Capitalizing improvements involves adding the cost of the improvement to the property’s basis, effectively spreading the expense over the property’s useful life. On the other hand, expensing improvements involves deducting the entire cost in the year the expense is incurred.

Capitalizing Improvements: Strategic Benefits

Certain property improvements are capitalized to enhance the property’s value or prolong its useful life. Capital expenditures are added to the property’s basis and are typically depreciated over time, which can provide long-term tax benefits. Capital improvements include significant renovations, structural enhancements, and additions that extend the property’s overall utility.

Expense Deductions: Immediate Gratification

Expensing improvements allows you to deduct the entire cost in the year the expense is incurred. This option is particularly beneficial for repairs and maintenance that keep the property in good condition but don’t significantly increase its value or extend its life. Expensing deductions offers immediate tax relief, improving cash flow in the short term.

Balancing Act: Practical Considerations

Deciding between capitalizing and expensing improvements requires a thoughtful approach. A key factor to consider is the improvement’s impact on the property’s value and longevity. Capitalizing improvements makes sense when they enhance the property’s overall worth, while expensing is suitable for routine maintenance.

Rental property ownership is an intricate investment, where basis and property improvements play pivotal roles, one must navigate with precision to maximize returns. However, it is crucial to heed a warning: failing to properly file rental property taxes can lead to costly consequences and missed opportunities. To avoid this pitfall, partnering with a professional bookkeeping and tax services firm becomes paramount. By integrating their expertise, you can ensure meticulous financial record-keeping, strategic expense management, and optimized tax strategies. For a trustworthy ally in this journey, consider reaching out to Better Accounting and safeguard your rental property ventures with expert guidance.

Understanding ERTC Credits: The Importance of Timely Claiming and Fund Amendments

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28 Aug 2023

Understanding ERTC Credits: The Importance of Timely Claiming and Fund Amendments

As businesses navigate the complexities of financial management, one key aspect that demands attention is the Employee Retention Tax Credit (ERTC). The ERTC has emerged as a significant component of economic relief, providing substantial benefits to businesses affected by the challenges of the past year. However, a crucial point often overlooked is the necessity of timely claiming of these credits, which can lead to the need for fund amendments.

ERTC Credits: A Recap

The Employee Retention Tax Credit was introduced as part of the CARES Act and extended by subsequent legislation to support businesses during the ongoing pandemic and economic recovery. It provides eligible employers with a refundable tax credit for wages paid to employees, allowing them to retain their workforce even in times of financial uncertainty.

The Timing Factor: Claiming ERTC Credits

The intricacy of ERTC credits lies in the timing of their claiming. The credits are applicable for specific periods, usually corresponding to quarters, during which a business has experienced a significant decline in gross receipts or been subject to a government-mandated shutdown. However, the credit is only beneficial when it is claimed against the applicable payroll tax obligations for the same period.This critical timing ensures that businesses directly offset their payroll tax liabilities, ultimately leading to substantial cash flow improvements. Failing to claim the credits in the year they are generated can result in missed opportunities for financial relief.

The Challenge of Fund Amendments

The urgency of claiming ERTC credits in the right year is underscored by the potential challenges posed by fund amendments. Since the credits are meant to offset payroll tax obligations, businesses must have sufficient funds available to benefit from them. Failing to claim the credits in the correct year may lead to budget constraints and the need to make amendments to allocate funds for the credits retroactively.Fund amendments involve revisiting financial allocations, reallocating resources, and sometimes even rearranging budget priorities. This process can be time-consuming, complex, and potentially disruptive to a business’s financial stability. Therefore, the importance of claiming ERTC credits in a timely manner becomes evident in avoiding the need for such resource-draining fund amendments.

Strategies for Smooth Claiming and Fund Management

To navigate the intricate landscape of ERTC credits and fund amendments, businesses should consider several strategies:

  1. Proactive Tracking: Establish a robust system for tracking and managing ERTC credits as they become applicable. Regularly review your eligibility and the periods in which credits can be claimed.
  2. Consultation: Seek advice from financial professionals and experts specializing in tax credits and incentives. Their insights can help you optimize your claiming strategy and minimize the need for fund amendments.
  3. Budget Planning: Incorporate ERTC credits into your budget planning to ensure funds are available for timely claiming. This proactive approach can help avoid the challenges associated with fund amendments.

The Importance of Strategic Financial Management

ERTC credits present a valuable opportunity for businesses to retain their workforce and mitigate the economic impacts of recent challenges. However, the timing of claiming these credits is of utmost importance to maximize their benefits. Businesses should recognize that timely claiming not only ensures cash flow improvements but also reduces the potential need for resource-intensive fund amendments. By integrating these factors into their financial management strategies, businesses can navigate the complexities of ERTC credits while fostering stability and growth.

Partnering with professionals who specialize in tax credits and incentives, such as Better Accounting, can provide invaluable guidance and support in ensuring the effective utilization of ERTC credits and the avoidance of fund amendments.

Unlocking the Kiddie Tax Code: Strategies for Paying Your Junior MVPs!

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28 Aug 2023

Unlocking the Kiddie Tax Code: Strategies for Paying Your Junior MVPs!

In the realm of tax planning, businesses are constantly seeking legitimate strategies to optimize their financial position while adhering to legal requirements. One such strategy gaining attention is the concept of paying your children under the age of 18 through a family management company. This approach, especially effective for S Corporations, presents a compelling tax advantage where the S Corp can claim the payment as an expense, while your child does not have to file a tax return.

Leveraging Family Management Companies

A family management company is a separate legal entity that acts as a management entity for multiple family businesses. It provides management services to other family businesses and charges them for its services. In the context of paying children under 18, a family management company can employ the child and provide legitimate services that align with their abilities and contributions.

Tax Advantages for S Corporations

For S Corporations, this strategy offers a distinct tax advantage. By employing a child under 18 through a family management company, the S Corp can deduct the child’s wages as a business expense. This effectively reduces the S Corp’s taxable income, resulting in potential tax savings. Furthermore, the child’s wages are typically subject to lower tax rates than those of the parent, further enhancing the tax benefits.

Benefits for the Child

From the child’s perspective, this strategy offers a unique opportunity to earn income without being subject to a significant tax burden. In many cases, the child’s income falls below the threshold that requires them to file a tax return. Therefore, the child can earn income while remaining exempt from filing requirements, providing them with an early financial education and experience.

Considerations for Implementation

While the tax advantages of paying children under 18 through a family management company are apparent, careful implementation is crucial to ensure compliance with tax laws and regulations. Here are some considerations to bear in mind:

  1. Legitimate Services: The family management company must engage the child in legitimate services that align with their abilities and contribute to the business’s operations. Documentation of services provided is essential to substantiate the legitimacy of the arrangement.
  2. Reasonable Compensation: The wage paid to the child must be reasonable for the services rendered. The compensation should be consistent with what an unrelated third party would pay for similar services.
  3. Recordkeeping: Accurate and comprehensive recordkeeping is vital to support the business expense deduction. Keep records of the services performed, hours worked, and compensation paid to the child.

Consultation and Professional Guidance

Approach this strategy with caution. Given the complexity of tax regulations and the potential implications of this strategy, seeking professional guidance is paramount. Tax professionals, financial advisors, and legal experts can offer insights and ensure proper compliance with all legal requirements. Partnering with tax advisors specializing in tax-efficient strategies, such as Better Accounting, can provide businesses with the expertise needed to implement this strategy effectively and reap its benefits while adhering to regulatory guidelines.

Maximizing Tax Efficiency

Paying children under 18 through a family management company offers a unique tax planning opportunity for businesses, particularly S Corporations. By structuring payments as legitimate business expenses, businesses can reduce their taxable income and potentially realize significant tax savings. Simultaneously, the child can earn income without facing substantial tax obligations.

Mastering Real Estate Investment: Gaining Financial Mastery

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24 Aug 2023

Mastering Real Estate Investment: Gaining Financial Mastery

Real estate investment is a dynamic realm that offers substantial opportunities for financial growth and stability to both seasoned investors and newcomers. However, beneath the surface of these lucrative opportunities lie intricate financial landscapes that demand careful navigation. In this blog post, we delve into the world of real estate investment through the lens of a strategic bookkeeping perspective. Uncover the foundational principles, financial efficiencies, and strategic maneuvers that can elevate your real estate ventures to new heights of success.

Structuring the Real Estate Investments: Building a Strong Foundation for Success

  1. Legal Entity Selection: To set the stage for a successful real estate investment, start by selecting the appropriate legal structure. Consider options like Limited Liability Companies (LLCs) or partnerships, which offer benefits in safeguarding personal assets and optimizing taxation. Seek guidance from experts who can provide valuable insights into the legal implications and tax advantages associated with each entity types.
  2. Effective Record Keeping: The cornerstone of prosperous real estate investment lies in meticulous record-keeping. Create a system for tracking income, expenses, and other financial transactions accurately. This practice ensures compliance with regulations and empowers you to make well-informed decisions based on a clear financial picture. Utilize software solutions or financial experts to establish efficient record-keeping protocols.
  3. Informed Financing Decisions: Choosing the right financing option is pivotal in shaping the financial trajectory of your investment. Whether considering traditional mortgages, private lenders, or partnerships, it’s crucial to understand the long-term implications of each choice.

Achieving Financial Efficiency in Real Estate Investment

  1. Tax Optimization: Unlock the potential of tax benefits in real estate investment by strategically utilizing deductions. Explore deductions for mortgage interest, property taxes, and depreciation.
  2. Effective Cash Flow Management: Ensuring a steady cash flow is essential for successful real estate investment. Develop robust cash flow management strategies to cover expenses, property maintenance, and unforeseen costs.
  3. Mastering Depreciation: Depreciation is a potential tax tool that distributes costs over the useful life of an asset. This is a tool that will enable you to minimize tax liabilities while maximizing your financial efficiency in your investments.
  4. Portfolio Diversification: Effectively diversifying your real estate portfolio is a cornerstone of successful investment. By spreading risks across different types and geographic markets, you create a resilient foundation.
  5. Informed Market Research: Understanding the nuances of local real estate markets is paramount. Thorough market research equips you with insights into economic trends, vacancy rates, and property appreciation potential.
  6. Strategic Exit Planning: Navigating the ever-evolving real estate landscape demands a clear exit strategy. A well-defined plan prepares you for changing market conditions and unexpected challenges.

Empowering Real Estate Investment Through Expert Bookkeeping Oversight

I know we just gave you a lot to think about and it can feel overwhelming and scary to venture into the real estate investment world. However, if done correctly and effectively, it can be a very rewarding experience. You do not need to know EVERYTHING; you need a team that knows how to help you achieve your goals. This is where bookkeeping and tax professionals can lend you a helping hand.

  1. Navigating Regulatory Compliance: Real estate investments exist within a landscape governed by intricate tax regulations and rigorous reporting requisites. The astute oversight of a proficient bookkeeper/tax expert ensures meticulous compliance, thereby mitigating the potential risks of penalties and legal complications.
  2. In-Depth Financial Analysis: The indispensable contributions of bookkeeping firms extend to the realm of comprehensive financial analysis. These firms bring forth a wealth of insights, discerning trends, pinpointing opportunities, and illuminating areas within real estate investment portfolios that merit enhancement.
  3. Crafting Holistic Strategies: The integral role of bookkeeping firms goes beyond mere financial management; they become architects of holistic strategies. Armed with a profound understanding of the multifaceted financial aspects of each investment, bookkeeping firms facilitate the development of strategies that seamlessly align with overarching long-term financial objectives. Their guidance ensures investments are not isolated, but rather part of a cohesive financial journey.

As you embark on your real estate investment journey, remember that the realm of numbers and properties is not without its share of excitement. You might need a bookkeeper/tax professional as your sidekick to guide you through the intricacies of finances but let your enthusiasm fuel your quest for prosperity. Here’s to financial adventures and profitable horizons ahead!