Taxable Income

Tax Breaks for Home-Based Businesses

Home-based business owners may not be aware that there are many ways to cut their tax bill. Many tax breaks are available for home-based businesses, here are some tips for taking advantage of these allowable business expenses.

Business structure

Sole proprietors must pay self-employment taxes. Forming a corporation or another business entity like an LLC and electing to treat it as an S Corporation may help reduce self-employment taxes. S Corporations allow home-business owners the opportunity to pay themselves a “reasonable salary” and treat any remaining profits as a profit distribution, both of which are not subject to self-employment taxes.

Losing IRA Status Under IRC § 408(e)(2)

Owners of Self-Directed IRAs which engage in certain types of “prohibited transactions” or invest in life insurance, foreign investments or collectibles may risk losing the tax-deferred status of their IRA accounts. If the owner (or beneficiary) of an individual retirement account, as described in I.R.C. §408(a), engages in any transaction that is prohibited under IRC §4975, the entire value of the IRA, determined as of the first day of the taxable year for which the account or annuity ceases to be an IRA, is treated as distributed to the IRA owner. See I.R.C. §408(e)(2)(B).

Taxes And Winning The Lottery

Hopefully, if one of us is ever lucky enough to win a big lottery jackpot, we won’t care about how much of it we have to “share” with Uncle Sam as taxes. But winning any immense lottery jackpot, especially some of the recent Powerball or Mega-Million grand prizes, is likely to result in a considerable share for the Department of the Treasury. How much in tax would the IRS receive from a $500 million lotto winner?

Converting Your IRA To A Roth IRA

In 1997, the Roth IRA was introduced. Since then, many people have converted all or a portion of their existing traditional IRAs to a Roth IRAs, where interest earned may be completely tax-free. This benefit applies as, once a taxpayer has held the account for five years, no taxes will be owed when the money is withdrawn at retirement. This is the opposite of a traditional IRA where a tax break is received in the present, but income taxes are paid in retirement.

Taking A Short-Term Loan From Your IRA

When strapped for cash, IRA owners have traditionally been able to take a short-term loan from their IRA, although this has been limited in recent years. Taxpayers may withdraw money from an IRA, without penalty or any tax liability, for up to sixty (60) days. The borrowed monies must be “rolled back” into an IRA within 60 days from the day after the date of the withdrawal, or income tax and penalties apply to the amount withdrawn and unreturned. Similar rules exist for rolling over one Roth IRA to another Roth IRA. The sixty day count involves calendar days, not business days. Keep in mind there is no extension for the sixtieth day falling on a weekend or holiday.

Deduction Thresholds And Bunching Expenses

All of us as taxpayers continually think we have a lot of expenses that we can itemize and deduct to help reduce our respective tax bills. But they come, they go, all for naught and no effect. The problem usually arises from the fact that our costs regularly fall just short of the required income thresholds for some categories of deductions. One solution is “bunching expenses,” which is a term used to describe incurring as many expenses as possible in a particular category during a particular tax year. Of course, doing this in one tax year will usually significantly diminish any chance of repeating it the following year.

Red Flags That Attract IRS Auditors

People typically think that the amount of their income is the biggest red flag that attracts an IRS auditor, and they would probably be right. But what are some of the other items on a tax return that may attract their attention? Some say that simple, plain returns are fairly safe and likely to avoid extended scrutiny by IRS auditors. According to the IRS, there are multiple ways a return may end up audited, here are some examples:

Erin Andrews Wins A $55 Million Verdict…Now For The IRS Bill

In early March, after a two-week trial and eight hours of deliberations, a Nashville jury awarded TV sports reporter Erin Andrews $55 million in damages for her lawsuit against a Nashville hotel after she was videotaped in 2008 without her knowledge. Andrews sued for $75 million in damages for negligent infliction of emotional distress and invasion of privacy.

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