Section 1202 Exclusion Example: What You Need to Know

[caption id="attachment_4556" align="alignright" width="300"] Accounting[/caption] The Section 1202 exclusion example is a provision in the new tax law that allows businesses to exclude from their taxable income up to 80% of the gain on the sale of certain qualifying small business stock (QSBS). This provision is effective for sales of QSBS acquired after December 31, 2017, and is retroactive to sales made after September 27, 2010. In this article, we will be discussing what you need to know about the Section 1202 exclusion example. This is a great way to learn more about how the section works and how it can benefit you. The Section 1202 exclusion allows for the gain from the sale of certain small business stock to be excluded from your taxable income. This provision is designed to help promote investment in small businesses. To qualify for the exclusion, the stock must be issued by a qualifying small business. The business must also meet certain other requirements, such as being engaged in a qualified trade or business and having gross assets of $50 million or less. If you sell your QSBS for a profit, you may be able to exclude up to 80% of the gain from your taxable income. This can be a significant tax savings for investors in small businesses. The Section 1202 exclusion is a great way to encourage investment in small businesses and help them grow. If you are thinking about investing in a small business, be sure to check if the business qualifies for the exclusion. It could save you a lot of money in taxes.

What are the requirements for a qualifying small business

For qualifying small business stock, the stock must be issued by a domestic C corporation that meets the following requirements:

1. The corporation is engaged in a qualified trade or business. This is generally any business other than a financial institution, farming, or natural resources extraction. Section 1202(e)(3) of the tax code defines a qualified trade or business for this purpose.
2. The corporation is not a publicly traded company. This means that the stock cannot be listed on a major stock exchange.
3. The stock is acquired by the taxpayer at original issuance in exchange for money, property (not including stock), or services rendered to the corporation.
4. The corporation must issue the stock for cash, property (not including stock), or services rendered to the corporation.
5. The corporation must be a C corporation at the time the stock is issued.
6. During substantially all of the taxpayer's holding period, the corporation must meet the active business requirement. This means that at least 80% of the value of the corporation's assets must be used in the active conduct of a qualified trade or business.

If the stock meets all of the above requirements, then the taxpayer may exclude up to 80% of the gain on the sale of the stock from their taxable income. This exclusion can be a powerful tool for investors in small businesses, as it can significantly reduce their tax liability. It's important to note that the exclusion is only available for sales of QSBS that are held for more than five years. Additionally, the exclusion is subject to a number of limitations and restrictions, so it's important to consult with a tax advisor before taking advantage of this provision.

10 Questions to Ask Your Accountant About Start Up Tax Exemption

[caption id="attachment_4534" align="alignright" width="300"] Start Up Services[/caption] Start up tax exemptions is a great way to help new businesses get started. They can help reduce the amount of money you owe in taxes, which can free up money to invest in your business. However, it's important to understand how start up tax exemption work before you apply for them. When starting a new business, it's important to be aware of the tax exemptions that are available to you. This can help you save money on your taxes and free up money to invest in your business. Start up tax exemption is a great way to reduce the amount of taxes you owe. It is also a way to free up some money to invest in your business. However, there are a few things you should know about start up tax exemption before applying for one. Here are 10 questions to ask your accountant about start up tax exemption:

1. What is a start up tax exemption? A start up tax exemption is a way to reduce the amount of taxes you owe on your business. It can help you free up money to invest in your business. This is because the government will not tax your business in its first year of operation.
2. How does a start-up tax exemption work? A start up tax exemption can help reduce the amount of taxes you owe in the first year of operation. This can help you free up money to invest in your business.
3. What are the benefits of a start up tax exemption? A start up tax exemption can help reduce the amount of taxes you owe. This is a great way to free up money to invest in your business. It can also help you get your business started on the right foot.
4. How do I apply for a start up tax exemption? You can apply for a start up tax exemption by filling out the necessary paperwork with the government. These forms can be found online or through your local government office.
5. What are the requirements for a start up tax exemption? There are certain requirements you must meet in order to qualify for a start up tax exemption. These requirements vary from country to country. However, some common requirements include being a new business, having a certain number of employees, and making a certain amount of revenue.
6. How long does a start-up tax exemption last? A start up tax exemption typically lasts for the first year of operation. However, this can vary depending on the country you are in.
7. What happens if I don't qualify for a start-up tax exemption? If you don't qualify for a start up tax exemption, you will have to pay taxes on your business. However, there may be other tax breaks or incentives you can take advantage of.
8. Can I apply for a start up tax exemption if I'm not a new business? No, you must be a new business in order to qualify for a start up tax exemption. This is because the government wants to help new businesses get started.
9. Do I need to have a certain number of employees to qualify for a start up tax exemption? This depends on the country you are in. Some countries require that you have a certain number of employees, while others do not.
10. How much money can I save with a start up tax exemption? The amount of money you can save with a start up tax exemption varies. It depends on the country you are in and the amount of taxes you owe. However, it is a great way to save money on your taxes and free up money to invest in your business.

The gig economy, also called sharing or access economy, is defined by activities where taxpayers earn income providing on-demand work, services, or goods. This type of work is often carried out via digital platforms such as an app or website. There are many types of sharing economy businesses, including two of the most popular ones: ride-sharing, Uber and Lyft, for example, and home rentals such as Airbnb.

If taxpayers use one of the many online platforms to rent a spare bedroom, provide car rides, or other goods or services, they may be part of the sharing or gig worker economy. Understanding how gig work can affect taxes may sound complicated, but it doesn't have to be. Let's take a look at what taxpayers should keep in mind:

Income is Taxable

Whether it's a full-time job or just a side hustle, taxpayers must report gig economy earnings on their tax returns. Income from these sources is taxable, regardless of whether an individual receives information returns. This is true even if the work is full-time, part-time, or a side job, if an individual is paid in cash, or if an information return like a Form 1099 or Form W2 is issued to the gig worker.

Many taxpayers opt for the standard deduction, but sometimes itemizing your deductions is the better choice - often resulting in a lower tax bill. Whether you bought a house, refinanced your current home, or had extensive gambling losses, you may be able to take advantage of tax breaks for taxpayers who itemize. Here's what to keep in mind:

Deducting State and Local Income, Sales, and Property Taxes

The deduction that taxpayers can claim for state and local income, sales, and property taxes is limited to a combined, total deduction of $10,000 - $5,000 if married filing separately. State and local taxes paid above this amount can't be deducted.

Refinancing a Home

The deduction for mortgage interest is limited to interest paid on a loan secured by the taxpayer's main home or second home. Homeowners who choose to refinance must use the loan to buy, build, or substantially improve their main home or second home, and the mortgage interest they may deduct is subject to the limits described under "buying a home" below.

Buying a Home

People who bought a new home in 2021 can only deduct mortgage interest paid on a total of $750,000 ($375,000 married filing separately) in qualifying debt for a first and second home. For existing mortgages, if the loan originated on or before December 15, 2017, taxpayers may continue to deduct interest on a total of $1 million in qualifying debt secured by first and second homes.

Charitable Donations

Donations to a qualified charity also qualify as a tax break. Taxpayers who itemize deductions can take advantage of a temporary suspension of limits on charitable contributions (CARES Act of 2020) that allows them to deduct cash donations to public charities in amounts of up to 100 percent of adjusted gross income (AGI). Normally, the limit for the deduction for cash contributions is 60% of AGI. As a reminder, the non-profit organization must be a 501(c)(3) public charity or private foundation, and non-cash donations may require a qualified appraisal. Taxpayers must have proof of all donations.

Deducting Mileage for Charity

Miles driven using a personal vehicle for charitable service activities could qualify you for a tax break. Taxpayers who itemize can deduct 14 cents per mile for charitable mileage driven in 2021, as well as 2022.

Reporting Gambling Winnings and Claiming Gambling Losses

Taxpayers who itemize can deduct gambling losses up to the amount of gambling winnings. You may deduct gambling losses; however, the amount of losses you deduct can't be more than the amount of gambling income you report on your return. Furthermore, you must keep a record of your winnings and losses. For example, you must keep an accurate diary or similar record of your gambling winnings and losses and be able to provide receipts, tickets, statements, or other records that show the amount of both your winnings and losses.

Investment Interest Expenses

Investment interest expense is interest paid or accrued on a loan or part of a loan that is allocated to property held for taxable investments - the interest on a loan you took out to buy stock in a brokerage account, for example. Taxable investments include interest, dividends, annuities, or royalties.

Wondering whether you should itemize deductions on your 2021 tax return? Don't hesitate to call the office and find out.

If you haven't contributed funds to an Individual Retirement Account (IRA) for tax year 2021, or if you've put in less than the maximum allowed, you still have time to do so. You can contribute to either a traditional or Roth IRA until the April 18, 2022, due date (April 19 if you live in Maine or Massachusetts), not including extensions.

Be sure to tell the IRA trustee that the contribution is for 2021. Otherwise, the trustee may report the contribution as being for 2022 when they get your funds.

Generally, you can contribute up to $6,000 of your earnings for tax year 2021 (up to $7,000 if you are age 50 or older). You can fund a traditional IRA, a Roth IRA (if you qualify), or both, but your total contributions cannot be more than these amounts.

Each year, the IRS announces the cost of living adjustments and limitations for retirement savings plans.

Saving for retirement should be part of everyone's financial plan, and it's important to review your retirement goals every year to maximize savings. If you need help with your retirement plans, give the office a call.

Are you wondering if there's a hard and fast rule about what income is taxable and what income is not taxable? The quick answer is that all income is taxable unless the law specifically excludes it. But as you might have guessed, there's more to it than that.

Taxable Income

Taxable income includes any money you receive, such as wages, tips, and unemployment compensation. It can also include noncash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return.

Nontaxable Income

Here are some types of income that are usually not taxable:

• Gifts and inheritances
• Child support payments
• Welfare benefits
• Damage awards for physical injury or sickness
• Cash rebates from a dealer or manufacturer for an item you buy
• Reimbursements for qualified adoption expenses

In addition, some types of income are not taxable except under certain conditions, including:

• Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
• Income from a qualified scholarship is normally not taxable; that is, amounts you use for certain costs, such as tuition and required books, are not taxable. However, amounts used for room and board are taxable.
• If you received a state or local income tax refund, the amount might be taxable. You should have received a 2021 Form 1099-G from the agency that made the payment to you. The agency might have provided the form electronically if you didn't get it by mail. Contact them to find out how to get the form. Be sure to report any taxable refund you received even if you did not receive Form 1099-G.

If you have any questions about taxable and nontaxable income, don't hesitate to contact the office today.

Some things naturally go together. For example, if you manage a fast-food restaurant, you probably sell similar combinations frequently, like a double cheeseburger, fries, and a soft drink. If you run a car dealership, there are numerous ways to upsell your customers by adding accessories, maybe at a discount. Even very small businesses can bundle items. You might sell handmade jewelry and want to put together a package that includes cleaner and cleaning cloths for one price.

You can, of course, continue to sell all of those products separately. But you may find you can bump up your sales (and profits) by creating assemblies (sometimes called "kits"), bundles of items that are sold as one unit. You can automatically build these using QuickBooks Desktop Premier or above. Here's how.

Putting Items Together

If you're already creating item records and recording product sales in QuickBooks, you probably already have Inventory turned on. If you don't, open the Edit menu and select Preferences. Click Items & Inventory, then Company Preferences. Make sure the boxes are checked for the options you want.

Figure 1: QuickBooks has several options for dealing with inventory. You should check your Preferences before you start entering sales.

Haven't started creating item records yet? If you have questions about how QuickBooks handles this, help is just a phone call away. In fact, this is encouraged because some of the records' fields may be foreign to you. If you want to try it on your own, however, you will need to open the Lists menu and select Item Lists. Next, click the down arrow next to Item in the lower-left corner and then click New. The New Item window will open. Since you're going to be building assemblies, you have to create records for all of the products that will be included. So choose the Inventory Part option under Type. Complete the rest of the fields here and click OK. Once you have enough product records created to start building assemblies, go through the same steps you went through to open the New Item window. Rather than selecting Inventory Part under Type, though, click on Inventory Assembly. Instead of defining a single item in this window, you'll be choosing the components that will be included. This is your Bill of Materials.

You won't have to complete every field in this window, but several are required. Give your assembly its own Item Name/Number. Then, so you know what you'll be pricing, jump down to the Bill of Materials window and select the items that your assembly will include in the table provided. If you completed all of the fields in the product records, QuickBooks will fill in the other columns on each line except for quantity (QTY) , which you must enter.

Figure 2: Enter the item name and quantity for every inventory part in your assembly, and QuickBooks will fill in the rest and calculate your total cost.

When you've completed the table for your assembly, enter the Total Bill of Materials Cost in the Cost field above it, then supply the Sales Price that you will charge. Select the correct Tax Code and Income Account. Then go down to the bottom of the screen under Inventory Information and select the appropriate Asset Account. You'll also need to specify at what point new assemblies should be built (minimum and maximum). There are four other fields on this line that QuickBooks will fill out once you start building assemblies and selling them.

Building Assemblies

The hard work is over now. When you want to actually start building assemblies, open the Vendors menu and click Inventory Activities | Build Assemblies. Select the kit you want by opening the drop-down menu next to Assembly Item. The items you selected will appear in the table below. QuickBooks will also display the maximum number of kits you can build given the quantity of inventory on hand. Enter the number you want in the Quantity To Build field and click the Build & Close button.

Now, when you go back to your item record, you'll see that QuickBooks has filled in the On Hand number to reflect the assemblies you just built.

Figure 3: QuickBooks will keep the numbers in the lower right corner of the assembly item record updated.

The process of building assemblies may feel a little foreign at first. And if you're going to keep some on hand, you'll need to pay extra attention to your inventory levels, which you can do by running the Inventory Stock Status by Item report. So, this is an area where you may need help. If that is the case, don't hesitate to call for assistance with inventory and assembly concepts or any other element of QuickBooks.