Business CPA

For Rental Owners: What does the IRS consider a passive activity?

Rental activities typically fall under “passive” activities. This means rental losses can only be deducted against passive income, not nonpassive income like wages or investment earnings.

If you’re unable to use rental losses in a given year, don’t worry—they carry forward indefinitely until your passive activities generate enough income to offset those losses.

However, if you “actively participate” in managing your rental property, you may be able to deduct up to $25,000 of losses against nonpassive income. Active participation includes making important decisions like tenant approval, setting rental terms, and overseeing major repairs. Even if you’re not hands-on all the time, arranging services or maintenance for the property can count as active participation.

The following flowchart can help determine if your Airbnb or rental property qualifies as a passive activity or not:

❓ Did you spend more than 500 hours working on your rental activities this year?

💡 If no, did you work at least 100 hours, and more than anyone else on this activity?
- 📌 If not, did you materially participate in at least 5 of the last 10 years?
  - 📌 If no, this is likely a passive activity.

❓ Was the average rental period 30 days or less?

✅ If yes, did you provide “significant services” (like housekeeping or meals) to guests? If so, this might be treated as non-passive.
- 📌 If the average rental was 7 days or less, your property should also be classified as non-passive.
- 📌 If the average rental exceeds 7 days, it likely remains a passive activity.

Tasks that count towards the 500-hour and 100-hour rules include showing the property to renters, reviewing leases, bookkeeping, scheduling repairs, and even managing vendors and staff.

Wondering if your rental qualifies as passive or non-passive income?

Get clarity before tax season hits. Contact us today, and we’ll help you navigate the complexities of rental activities and maximize your deductions.

How an S-Corp Can Reduce Your Taxes in 2024

Most businesses begin as a sole proprietorship because it’s easier to start and requires less paperwork and regulatory overhead. It generally costs less than filing as a Limited Liability Company (LLC) or Incorporation (INC).

However, each of these legal statuses has certain tax strategy advantages, so it’s important to carefully consider which status is:

1️⃣ The best legal structure for your business goals.
2️⃣ The most tax beneficial, keeping more money in your pocket annually.

❓ LLC and Inc Can Elect S-Corp Status

If you choose an LLC or INC, you can elect for either entity to be treated as an S-Corp with the IRS for tax purposes. This election can save your small enterprise from paying more to the IRS.

💡 The Tax Advantage of S Corporations

For those choosing either the LLC or INC entity, S-Corp status allows the business to use “pass-through taxation” (i.e., business income goes directly to owners instead of the corporation). This allows the business and owner to potentially save money, avoiding the payroll taxes on LLC profits or the double taxation faced by INCs when distributing money.

📌 Brief Overview of an INC Structure

Protection from Liabilities
INC (Incorporated) status offers business owners (i.e., shareholders) the strongest protection from business liabilities, as it is a separate legal entity from the owners and shareholders.

Shares and Shareholders
With an INC, the business can also sell shares of stock and offer employees a stock option plan. INCs may have any number of shareholders. Note that most public companies you may hold shares of stock in are generally structured as an INC too.

C-Corp and Double-Taxation
Keep in mind that when setting up an INC, the IRS automatically treats the entity as a C-Corp, where all profits and losses flow to the corporation. Taxes are paid at C-Corp rates, and the only way to extract money for a shareholder/business owner is through dividends or W2 salary. This setup results in “double taxation”—first at the corporate level and again at the individual level on dividends and salaries. Electing S-Corp status allows you to avoid this by paying payroll taxes only on a reasonable W2 salary, with the rest taxed at your individual effective tax rate.

📌 Brief Overview of an LLC Structure

Brief Overview of an LLC Structure

Flexible Business Structure
A Limited Liability Company (LLC) is the most common alternative to the INC. The business structure of an LLC is more flexible than an INC, easier to maintain without the required annual meetings and minutes, and still provides a good deal of protection from legal liability, as long as the owner maintains a clear corporate veil by separating business and personal finances.

Less Paperwork and Administration
LLCs require less paperwork to form than S Corps. For one thing, there is no board of directors. The LLC’s owners just file the Articles of Organization for the LLC with the state agency. LLCs are then required to get an EIN from the IRS and maintain the necessary licenses and permits, just like INCs.

Tax Election Choices
An LLC has one class of shareholders/members and can choose how it will be taxed—Sole Proprietorship (SchC) filing, Partnership, S-Corp, or C-Corp. The tax election depends on your business and its needs. LLCs are generally classified as pass-through entities, with any profits and losses passing through to the members and reported on their personal tax returns unless they opt for C-Corp taxation.

❓ How Can Electing S Corp Status with the IRS Benefit Me?

S Corp Election Does Not Change the Business Legal Structure
Becoming an S-Corp is done strictly for tax purposes. A business stays the same legal structure of an INC or LLC, but by electing S-Corp status, the business can have its profits and losses pass through to individual tax returns, potentially saving on taxes.

Minimizing Payroll Taxes with S-Corp Status
The main reason for choosing to elect S-Corp tax status is to avoid paying payroll taxes on all of your profits and avoid double taxation. Instead, an S-Corp election allows business owners to pay themselves a “reasonable” salary, with payroll taxes only on that portion. This can be determined by taking an S Corp Compensation Test to figure out what the “reasonable” salary should be.

Is Electing S Corp Status the Right Choice for My Business?

S-Corp Is Not Ideal For Everyone
While all S-Corp profits and losses are passed through to an individual 1040, making the S-Corp election is not necessarily beneficial for all businesses. Startups looking to take on equity investment, businesses offering equity compensation, or partnerships splitting profits and equity interests are examples where an S-Corp election may not be the right choice.

Maintaining S-Corporation Tax Election
To maintain an S-Corp tax election, the business must be a U.S. LLC or INC with only one class of stock and fewer than 100 shareholders. All shareholders must be individuals, estates, or specifically qualified trusts. Each shareholder must consent in writing to the S-Corporation election, and each must be a U.S. Citizen or permanent resident alien with a U.S. Social Security number.

S Corp Must Have a December 31st Year-End
The tax year for an S-Corp must end on December 31st.

Changing Tax Election with the IRS
You can always update your tax election with the IRS at any time. There may be tax consequences for doing so, but it’s possible by a majority shareholder vote. Note that with the 199A (Qualified Business Income Deduction) deduction, electing S-Corp status could further maximize your tax savings depending on your industry.

Need Help?

We have been helping small business owners identify their business entities for over a decade. Plus, we advise on how to best set up your entity to maximize your tax benefits. Contact us today to start saving on your business and individual taxes tomorrow.

Do Olympians Pay Taxes on Their Medals? Tax Hacks for Winning Athletes

Hey there, athletes! It’s your friendly CPA team at Insogna CPA, here to share some smart tax tips tailored for your Olympic triumphs in 2024. Taxes might sound like a hurdle, but we’ve got the insider tips to help you keep more of your hard-earned prize money and NIL (Name, Image, and Likeness) earnings in your pocket.

❓ What Are Taxes?

When you’re cashing in on those Olympic prizes and NIL earnings, Uncle Sam wants a slice of that pie. And it’s not just federal income tax you need to think about—FICA payroll taxes are in play too, covering Social Security and Medicare.

But don’t stress! We’re here to break down how setting up an LLC-SCorp can help you sidestep some of those tax hurdles and save you money. Think of it as a victory lap for your wallet.

❓What Is My Tax Responsibility?

Whether you’re a gold medalist or just starting to cash in on your NIL, the IRS expects its fair share. But with smart planning, you can minimize your tax bill and keep more of your Olympic prize and NIL money for yourself.

🚩 Consider Setting Up a Business Entity

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💵 Keep Track of Your Expenses

Every gold medal comes with a price tag, and so do your NIL earnings. Training, travel, equipment—they all add up. But here’s the good news: many of these expenses can be deducted from your taxable income, saving you money.

Keeping organized records is key, so consider setting up a separate LLC account for your business transactions. With a CPA on your team, you’ll know exactly what you can deduct, helping you keep more of your earnings.

💡 Plan for Self-Employment Taxes

As an Olympic athlete with NIL earnings, you’re essentially running your own business, which means you’re responsible for self-employment taxes. This includes both the employee and employer portions of Social Security and Medicare taxes. Planning ahead and setting aside funds for these taxes is crucial to avoid any unpleasant surprises.

Pro tip: A CPA can help you budget and make sure you’re on track with your tax payments, so you can focus on what you do best—winning.

💵 Save for Retirement

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💡 Understand State Tax Implications

If your Olympic journey takes you across state lines, you might owe taxes in more than one state. This can get tricky, but with a CPA’s help, you can navigate the maze of state tax rules and make sure you’re in compliance no matter where you earn your money.

💬 Seek Professional Advice

Here’s a crucial tip: always seek advice from licensed professionals. A CPA is your go-to resource for managing your finances and taxes, ensuring you’re making the best decisions for your future. Don’t cut corners—invest in quality advice to protect your hard-earned cash.

Ready to score a win for your finances?

Reach out to us today, and let’s make sure your Olympic earnings work as hard for you as you did to earn them. We’re here to help you navigate the tax game and set you up for a financially secure future. Don’t wait—get in touch now and let’s secure your victory lap!

S Corporations: Operations and Filing Taxes

Business owners often wonder which business entity makes the most sense for their situation. An S Corporation (S Corp) is a popular choice because it offers both personal liability protection and certain tax benefits for corporate and personal income tax.

This article covers the basics of becoming an S Corporation, including the election process for business tax purposes.

1️⃣ How to Become an S Corporation

Two business entities can elect to file business taxes as an S Corporation: Inc and LLC. The election process is the same for both.

1.1) Complete IRS Form 2553 Within Two (2) Months and Fifteen (15) Days

The business must complete IRS Form 2553 (Election by a Small Business Corporation) within a certain timeframe.

For current businesses: no more than two months and 15 days after the beginning of the tax year when the election goes into effect. For new LLCs and C Corporations: two months and 15 days from the date of formation to choose the S Corporation election status.

1.2) What Happens If You Miss the Deadline for the S Corp Election

If you miss the deadline, you will follow these tax guidelines for the current tax year:

Corporations are taxed as C Corporations.
Single-member LLCs are taxed as sole proprietorships.
Multi-member LLCs are taxed as partnerships.

1.3) Requesting a Late Election from the IRS

If you miss the timeframe to file Form 2553, you can request a late election from the IRS.

2️⃣ S Corporation Business Operations

S Corporations operate a little differently from other business entities.

Here are the key differences to consider.

2.1) How to Pay Yourself as an S Corp Owner

One of the benefits of an S Corporation is the lack of double taxation. It’s important that owners pay themselves correctly to avoid triggering an audit from the IRS.

Any S Corporation owner who is active must pay themselves a reasonable salary. All employee-owners must take a reasonable salary via W-2. The remaining profits are then taxed on your 1040, saving you payroll tax on the owner-draw portion not paid as a W-2 salary.

2.2) Ongoing Compliance Requirements for S Corporations

Both LLCs and C Corporations may elect S Corporation status if they meet IRS requirements. However, the process can be complicated. The ongoing compliance requirements vary from state to state, but here are the basics:

LLC Requirements

✅ Initial Filing: File articles of organization to form an LLC. Pay filing fees.
✅ Initial Report: Some states require a statement of information with the initial filing.
✅ Publication Fees: Some states charge a publication fee.
✅ Annual Report: Most states require an annual report to maintain LLC status.
✅ Maintaining a Registered Agent: An LLC is required to record a Registered Agent with each state in which they do business. This person (or entity) is notified in the event of a lawsuit.

C Corporation Requirements

✅ Initial Filing: File articles of organization to form a C Corporation. Pay filing fees.
✅ Initial Report: Some states require an initial report.
✅ Publication Fees: Some states charge a publication fee.
✅ Annual Report: Most states require an annual report.
✅ Annual Meetings: C Corporations are required to hold annual meetings.
✅ Meeting Minutes: A written record of meetings is required.
✅ Maintaining a Registered Agent: A C Corporation is required to record a Registered Agent with each state in which they do business.

Get Help Filing Taxes and Ongoing Operations for Your S Corporation

We understand that navigating the complexities of S Corporation taxes and operations can be overwhelming. Let us lighten the load. We’ll help you determine a reasonable W2 salary and ensure you avoid overpaying unnecessary payroll taxes.

Reach out to us today for personalized assistance with your tax strategy—because your success is our priority. Let’s work together to make your financial journey as smooth as possible. Contact us now and let’s start saving you money!

Employee Bonuses: The Tax Implications of Paying Bonuses to Employees in 2024

Bonuses are taxed differently as “Supplemental Wages”. A bonus is always a welcome bump in pay, but it’s taxed differently from regular income.

Instead of adding it to your ordinary income and taxing it at your top marginal tax rate, the IRS considers bonuses to be “supplemental wages” and levies a flat 22 percent federal withholding rate, unless your employer pays bonuses alongside regular wages. Then, the tax withholding on your bonus is calculated at your regular income tax rate, which is based on your tax bracket.

When taxed this way, your initial tax withholding is higher. In general, bonuses of any kind, including signing bonuses and severance pay, fit into the supplemental wages category.

What Does the IRS Consider to be "Supplemental Wages"?

Other examples of supplemental wages include:

✅ Accumulated sick leave
✅ Certain commissions
✅ Overtime pay
✅ Prizes and awards
✅ Back pay
✅ Reported tips
✅ Retroactive pay increase
✅ Payments for nondeductible moving expenses
✅ Specific forms of equity compensation (like restricted stock units and exercises of non-qualified stock options)

Employee Achievement Awards - The Exception to the Supplemental Wages Rules

The IRS will expect its cut of any bonus you receive, whether it’s in cash, gift cards, a vacation, or other benefits. The exception to this rule is if your bonus can qualify as an employee achievement award.

You might be able to avoid paying federal income taxes under the following conditions:

💡 The award isn’t cash, a cash equivalent (such as a gift card or money order), tickets to events, vacations, stocks, bonds, or other prohibited items.
💡 The award is tangible personal property.
💡 The total value of the award doesn’t exceed $1,600.

📜 Tax withholdings aren’t the end of the story.

The method used to calculate the federal withholding on your bonus can have a big impact on your take-home pay. Still, you won’t know how much you actually owe the IRS until you file your tax return the following year.

📉 Reducing the Risk of Owing the IRS Money

You can reduce the risk of owing the IRS money by reviewing your W-4 withholdings. The IRS Tax Withholding Estimator is a good place to start. Also, if you receive a large bonus or your financial circumstances change, it may be best to talk to us for advice.

💵 Lowering Your Tax Withholding on Bonuses

Want to lower the amount of taxes withheld from your bonus? Consider paying a bonus separately from a regular paycheck. From there you can see if you should calculate its tax withholding at the 22 percent flat rate the IRS allows for supplemental wages.

Need help? 👋

As a small business owner, understanding the tax implications of employee bonuses is crucial. Need help navigating these waters? Schedule a chat with us today, and let’s make sure your bonuses benefit both your team and your bottom line.

12 Common Tax Problems to Avoid in 2024

If you’re one of those who gets worked up over filing your tax return, there are steps you can take to ease the struggle and avoid common tax issues reported each year.

Here are the top 12 tax issues, broken down into categories for business owners and individual taxpayers, and how everyone can minimize their impact this year.

1️⃣ Avoid penalties and fines by understanding the rules about deductions.

Tax deductions are a great way to minimize taxes when used correctly, but they are frequently abused and overused. Deductions should cover business-related expenses, including capital expenditures, client gifts, and business travel. Vacation expenses don’t count just because you discussed business. The IRS has rules on what and how much can be deducted. Include only legitimate expenses to avoid penalties.

2️⃣ Failing to keep track of business expenses that can be deducted.

Many business owners miss out on deductions because they don’t track their expenses properly. This often happens when personal and business expenses mix or when cash is used without proper documentation. Deducting legitimate expenses can save significant money, so keep all receipts and consult a tax professional to understand allowable deductions.

3️⃣ Failing to choose a reputable professional tax preparer.

It’s nice of your cousin or neighbor to help, and you might save money with a storefront tax preparer, but many taxpayers end up in trouble due to incompetence or fraud. Unreliable preparers can cause penalties, fines, or even steal your refund. Choose a professional with a solid reputation. Beware of those promising specific refunds without reviewing your documents or charging fees based on refund amounts.

4️⃣ Filing after the deadline.

Filing late can result in fines and penalties and increases the risk of errors, audits, and delays. If you’re perpetually late, it can affect the accuracy of your current return and delay any refund or credits due. Always aim to file on time.

5️⃣ Failure to file a return at all.

Ignoring tax laws and not filing a return is a big mistake. Even if you can’t pay the owed amount, you can request an installment agreement to spread out payments. Failing to file results in harsher penalties than filing and paying in installments or requesting an extension.

6️⃣ Simple mathematical errors.

Double-check your math before submitting your return. Small mistakes can lead to big headaches. Better yet, consider using a professional tax preparer to avoid these errors entirely.

7️⃣ Administrative errors.

Ensure all forms are filled out correctly. Common mistakes include incorrect Social Security numbers, bank account details, and missing signatures. These errors can delay your return processing and lead to additional scrutiny. Double-check:

- ✅ Social Security Number
- ✅ Bank Account Numbers and Routing Numbers
- ✅ Signature and Date Lines

8️⃣ Not staying current with updates to tax laws.

Every year, there are new updates to the tax code that can make a big difference, and every year there are taxpayers who fail to take advantage of them because they simply weren’t aware that they existed. If you’re going to do your taxes yourself, take the time to stay up-to-date. Alternatively, you can work with a tax professional: part of their job is to know all the new laws and apply them to your best advantage.

9️⃣ Don’t use the wrong filing status.

Single. Head of Household. Married filing jointly. Married filing single. It can be very confusing to know which benefits you most, and choosing wrong can make an enormous difference. There are a lot of things that married couples are entitled to if they file jointly, and a lot of disadvantages to filing single. Take the time and do the math so that you know you’re doing the right thing.

1️⃣0️⃣ Clutter may be bad, but you should hold on to your old tax returns.

No matter how much you try to keep it simple and purge old paperwork, your past tax return is one thing you really need to hold on to in case the IRS comes back and asks questions or you realize that you’re entitled to a refund if you file an amended return. Having the paperwork handy means you can give it to attorneys, mortgage brokers, accountants, and the IRS itself in case they ask for it or if providing it would help your situation.

1️⃣1️⃣ Learn about and take advantage of every potential deduction.

Of all the painful mistakes that taxpayers make, overpaying is at the top of everybody’s list. What could be worse than giving the government more of your hard-earned money than you needed to? The best way to avoid this mistake is to go through the lists of possible deductions and write down everyone you might be able to take, then see if you can use it.

1️⃣2️⃣ Not using the right tax forms for your needs or status.

Though most people are familiar with the 1040 form, it’s not necessarily the right one for everyone. While 1040 works for those who itemize or who own their own business, people who are W-2 employees without a lot of complicating factors may be better off using the 1040EZ form. Likewise, you need to make sure that there aren’t mistakes on any of the paperwork that you’re handing in, whether it’s your W-2 or information from any of your banks. Finally, many people are taking advantage of electronic filing to get their returns in on time and get their refunds more quickly, and if you’re doing that too, make sure that you’ve input the correct.

If there are errors on your W-2 Forms or other financial forms, make sure you address them sooner rather than later, or else the IRS will become involved. If you’re filing electronically, double-check every digit of your information to avoid delays.

What if you can’t avoid a common tax issue?

No matter how hard you try, at some point, you may find yourself facing one or more of the issues cited above (or something entirely different that we haven’t included). If that happens to you, contact us immediately for expert professional help.

Need a hand with your taxes? Our friendly, CPA team is here to help you navigate any tax challenge with ease. Reach out today and let’s tackle those tax issues together!