The world of capital assets can be a complex landscape, especially when it comes to making decisions about expensing or depreciating. In this blog post, we’ll unravel the intricacies of this choice, shedding light on considerations, and offering guidance in alignment with the Federal Tax Code.
Understanding the Basics: Expense vs. Depreciation: Before diving into the decision-making process, it’s crucial to distinguish between expensing and depreciating a capital asset.
Expense: This involves deducting the full cost of the asset in the year of purchase. Ideal for assets with a short lifespan, typically one year or less.
Depreciation: Spreading the cost of the asset over its expected useful life. Suited for assets with a longer lifespan, enabling a gradual deduction over several years.
Federal Tax Code Implications: Understanding the Federal Tax Code is fundamental in making informed decisions about capital assets.
Tax Benefits: Depreciation often provides tax advantages, allowing for deductions over several years and potentially lowering taxable income annually.
Section 179 Deduction: Consider the immediate expense deduction under Section 179 for qualifying assets. This can be a valuable tool for businesses, with limitations outlined in the tax code.
Bonus Depreciation: Explore the option of bonus depreciation, offering an additional deduction in the year the asset is placed in service, subject to specific conditions.
Factors Influencing the Decision:
Asset Lifespan: Tailor your decision to the anticipated lifespan of the asset. Shorter-lived assets may benefit from expensing, while longer-lived assets align well with depreciation.
Cash Flow: Evaluate your current cash flow. Expensing provides an immediate deduction, advantageous for businesses mindful of liquidity.
Nature of the Asset: Certain assets, like machinery or vehicles, may have established depreciation guidelines in the tax code. Adhering to these guidelines ensures compliance.
What Should You Do and How to Do It?
Assess Asset Lifespan: Evaluate how long you expect the asset to remain in service. For shorter lifespans, expensing may be favorable; for longer lifespans, depreciation is often more appropriate.
Consult Tax Professionals: Seek advice from tax professionals who can provide tailored recommendations based on your unique business circumstances.
Stay Informed on Tax Code Changes: Regularly update yourself on changes in the Federal Tax Code, particularly in Section 179 and bonus depreciation, to optimize your tax strategy.
Record-Keeping: Maintain accurate records of asset details, purchase costs, and depreciation calculations. This ensures compliance and simplifies reporting.
As you stand at the crossroads of expensing or depreciating a capital asset, remember that there is no one-size-fits-all solution. Your decision should align with the specifics of your business, financial goals, and the ever-evolving Federal Tax Code. Stay informed, seek professional advice, and tailor your strategy to suit your unique circumstances.
If you are grappling with the decision on expensing or depreciating a capital asset, our expert team is ready to assist. Contact us today for personalized guidance and ensure your strategy aligns seamlessly with the complexities of the Federal Tax Code.
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This newsletter is provided by
Giles Consulting
2600 South Loop West, Suite 304
Houston, Texas 77054
accountingservices@riochigiles.com
www.riochigiles.com
Welcome to a new year filled with possibilities! As we step into 2024, it’s time to equip ourselves with the knowledge and strategies needed to conquer the upcoming tax season. In this comprehensive guide, tailored for both individuals and small business owners, we’ll delve into key aspects to ensure a smooth and successful filing for the 2023 tax year.
Gathering Essential Tax Information for 2023 Filing As the tax season kicks in, the first crucial step is gathering essential documents. Reviewing W-2s, 1099s, K-1s, and other relevant paperwork is paramount. Be proactive in ensuring accuracy, and don’t hesitate to communicate with issuers for any necessary corrections. Accuracy now sets the foundation for a stress-free filing later.
Organizing Records Effectively for a Seamless Filing Process To ensure a seamless filing process, it’s essential to organize records effectively. Consider transitioning important information from the previous year and embrace digital record-keeping tools. By maintaining order throughout the year, you’ll transform your tax season experience into a smoother, more efficient process.
Setting an April 15th Reminder – Your Tax Milestone April 15th isn’t just a date; it’s a milestone in your financial calendar. Create personalized reminders for essential tax tasks, including filing your 2023 income tax return, addressing extensions, and other critical deadlines. By staying ahead, you’ll navigate tax season with ease and avoid any last-minute pressures.
Understanding Business Return Deadlines for a Smooth Process For small business owners, understanding business return deadlines is key. Mark your calendar for partnership and S corporation deadlines on March 15th, and the calendar-year C corporation deadline on April 15th. Timely submissions ensure a smooth tax season for your business, allowing you to focus on what you do best.
Reviewing Your Child’s Income – A Family Affair Make tax season a family affair by reviewing your child’s income. Evaluate whether your child needs to file a 2023 income tax return, considering income thresholds and the associated tax implications. Taking a proactive approach to your family’s financial situation ensures a well-rounded and informed approach to tax season.
Contributing to Your IRA and HSA – Maximizing Financial Opportunities Seize the opportunity to maximize your financial opportunities by contributing to your IRA and HSA before the April 15th deadline. Understand contribution limits, benefits, and align these contributions with your long-term financial goals. It’s a small step that can have a significant impact on your financial well-being.
Calculating Estimated Tax for Extensions – Planning for Flexibility Consider the option of filing an extension with a clear understanding of its implications. Accurately calculate your 2023 tax liability, ensuring a smooth process. Remember, extensions provide flexibility but require timely submission of payments to avoid penalties.
As we embark on the 2024 tax season, let’s embrace the opportunity to master our finances. With proactive steps, organization, and a keen understanding of key deadlines, you can make this tax season your most successful yet. Remember, our team is here to support you at every stage.
Ready to make 2024 your financial success story? Reach out to our professional tax preparation services for personalized assistance. Subscribe for more insightful updates, and let’s make this tax season one of empowerment and financial mastery!
This newsletter is provided by
Giles Consulting
2600 South Loop West, Suite 304
Houston, Texas 77054
accountingservices@riochigiles.com
www.riochigiles.com
The freedom to follow your passion and establish your own hours are only two advantages of being self-employed. However, it also has additional tax obligations that you might not be aware of. In this article, we’ll examine some of the major tax issues that affect self-employed people and discuss how to deal with them.
What Does “Self-Employed” Mean?
Self-employment means that you run your own business or provide freelance services as a sole proprietor or independent contractor, rather than working for someone else. Individuals who work for themselves must pay both the employer and employee portions of Social Security and Medicare taxes, also known as self-employment taxes.
Examples of activities that would make someone self-employed include:
Owning and operating a small business
Providing freelance services, such as writing, photography, or consulting
Renting out a room in their home on platforms like Airbnb
Driving for ride-share services like Uber or Lyft
Delivering food or other goods for companies like DoorDash or Amazon Flex.
What Are Self-Employment Taxes?
Self-employment taxes are taxes paid by self-employed people to cover their Social Security and Medicare contributions. These taxes are calculated based on the net income earned from self-employment, with a maximum earning limit that is subject to change annually.
The self-employment tax rate is currently set at 15.3%, with 12.4% going to Social Security and 2.9% going to Medicare. It is important to note that self-employed individuals are responsible for both the employer and employee portions of these taxes, as opposed to employees, who have their employer pay half of their Social Security and Medicare taxes.
Self-employment taxes must be paid quarterly in the form of estimated tax payments, or an individual may elect to have these taxes deducted from their business earnings. The Internal Revenue Service may levy penalties and interest if self-employment taxes are not paid.
Calculating Self-Employment Tax
Self-Employment tax applies to anyone that receives $400 or more from self-employment or $108.28 or more if you are a church employee. The tax is divided into two parts – Social Security and Medicare tax. Each is calculated differently.
Social Security Tax
As of 2022, self-employed individuals owe 12.4% for social security on the first $147,000 of net earnings. If you make more than $147,000 in a year, the rest of the earnings are not taxes for social security.
Medicare Tax
As of 2022, self-employed individuals pay 2.9% on their first $200,000 of net earnings for Medicare.
If married, you will pay 2.9% on the first $250,000 of combined self-employment earnings filing jointly or $125,000 filing separately.
For earnings over the income threshold, you must pay an additional 0.9% in Medicare taxes which increases the tax rate to 3.8% for the higher income earners. Unlike the Social Security portion, there’s no maximum amount for the Medicare portion of self-employment tax.
How to Pay Self-Employment Taxes
It’s also important to be aware of estimated taxes, which self-employed individuals are required to pay throughout the year. These taxes are based on your expected income and self-employment taxes for the year and are generally due on a quarterly basis. Failure to pay estimated taxes can result in penalties and interest, so it’s important to stay on top of these payments.
If you expect to owe more than $1,000 in self-employment taxes, you are responsible for making estimated quarterly tax payments to the IRS by mail or online via website or app. And when you file your taxes, you will file an annual tax return using Schedule SE to report your self-employment taxes paid.
To prepare for the 2023 tax year, here are the due dates for the quarterly tax payments:
If you earn income from January 1 – March 31, 2023, then your payment is due on April 18, 2023
If you earn income from April 1 – May 31, 2023, then your payment is due on June 15, 2023
If you earn income from June 1 – August 31, 2023, then your payment is due on September 15, 2023
If you earn income from September 1st to December 31st, then your payment is due on January 15, 2024
Here at Giles Consulting, in most situation we advise clients to set aside at least 30% of their net self-employment income throughout the year in order to be able to pay their Social Security, Medicare and income taxes.
Tax Deductions for Self-Employed Individuals
Not only do you have to pay ordinary income taxes, but you also have to pay self-employment tax which encompasses the part your employer would typically pay directly. This means a lot more of the tax burden is coming out of your finances. Which makes one of the most significant tax benefits for self-employed individuals is the ability to deduct business expenses.
As a self-employed individual, your tax liability is based on your net earnings. Net earnings refer to your gross business income minus the deductions the IRS allows you to claim. When it comes to filing your taxes, you may be able to deduct a variety of expenses, including your computer, travel, gas costs, and even retirement savings. Here are few strategies and common tax deductions for self-employed.
Maximize your contributions on retirement plans to lower your taxable income.
Take deductions for business overhead expenses, including any equipment or property you use in the course of your business.
Make donations to charity organizations, as you won’t have to pay income tax on the money you contribute.
Maximize your Health Savings Account contributions to take full advantage of deductions.
Self-Employment Tax Deduction: You may reduce your net earnings by half the amount you paid in social security taxes. Half of your social security tax (the part employers typically pay for employees) may also be deducted.
Home-office deduction: Another good way to save money on your taxes is to use the home office deduction. However, be cautious when claiming this deduction because the IRS has strict limitations on it. Rent, insurance, utilities, repairs, and mortgage interest are all allowable deductions. Direct expenses are completely tax deductible. Indirect expenses may be deducted in one of two ways. You can use the simplified method or the regular method which is based on the percentage of your house or apartment that your office occupies.
Qualified Business Income Deduction: If you have a “pass-through” business entity like a sole-proprietorship, partnership, S corporation, or LLC, you may be able to deduct up to 20% of your qualified business income (QBI) on your taxes. QBI is your company’s profit, minus non-qualified income.
Other Business Tax Deductions
Advertising and marketing costs
Bank fees
Business travel
Mobile phone and Internet costs
Continued Education
Health insurance premiums
Legal and professional fees
Start-up costs
Tax Advice and preparation fees
Personal Tax Deductions
Charitable donations
Medical expenses
Mortgage interest
Moving expenses
Retirement contributions
Student loan interest
These are just a few of the more common tax breaks available to self-employed individuals. A tax professional may be able to identify additional deductions. They may also assist you in determining which deductions apply to your specific situation.
Be sure to keep accurate records of all your business expenses, because you will need to provide documentation when claiming your deductions. Because tax laws and regulations change, it’s crucial to stay educated and consult a tax professional to make sure you are fulfilling your tax duties.
Don’t let taxes stress you out – take action now and get the help you need to ensure your taxes are filed correctly and on time.
It is that time of year again. Ugh, right?!?! Taxes may not be the most exciting topic, but being informed and prepared can help you avoid any stress or unexpected surprises come tax time. A few changes come with the 2023 tax season. Let’s not waste too much time and dive right in.
Standard Deductions Increase: For 2022, the standard deduction increased to $12,950 for single filers and $25,900 for married couples filing jointly. You will have the option of taking the standard deduction or itemizing your deductions, which is calculating your deductions one by one. Itemizing can be complicated, but it is well worth it if they add up to more than the standard deduction.
Filing Status
2021
2022
2023
Single
$12,550
$12,950
$13,850
Married Filing Jointly
$25,100
$25,900
$27,700
Married Filing Separately
$12,550
$12,950
$13,850
Head of Household
$18,800
$19,400
$20,800
And to keep you on your toes, might as well know that it will increase again next year. When you file in 2024, it increases to $13,850 for single filers and $27,700 for married couples filing jointly.
Not sure whether or not to take the standard deduction or itemize? Each taxpayer’s situation is different. So please reach out to a trusted tax advisor to assess your situation.
Unfortunately, a lot of the extra added benefits that came with the pandemic in 2021, goes away. The IRS warns us to expect smaller tax refunds in 2023. Two of the biggest reasons are:
There were no economic impact payments in 2022, so you won’t get an extra stimulus payment in your 2023 tax refund checks.
Expanded tax credits and deductions reverted to their pre-COVID-19 amounts.
Tax Deductions and Credits to Consider for 2023 and 2024
Tax credits can significantly reduce your tax liability. Some common tax credits include the earned income tax credit, the child and dependent care credit, and the American Opportunity Tax Credit. Be sure to familiarize yourself with the tax credits that you may be eligible for and take advantage of them when you file your tax return.
Retirement Plans: You can contribute up to $22,500 into 401(k), 403(b) and most 457 plans — $2,000 more than the $20,500 contributions limit for 2022. This can help you save more for retirement which in many cases will help lower your income tax. In addition, the limit on annual contributions to an IRA increased to $6,500 up from $6,000.
Charitable Deductions: The $600 charitable deduction for non-itemizers taking the standard deduction is no longer available. Although you can still deduct qualified charitable donations you made in 2022, it is limited to 60% of your adjusted gross income (AGI).
Earned Income Tax Credit (EITC): The EITC is a refundable credit designed to assist low- and middle income households. In order to qualify in the 2022 tax year, an individual with no children, maximum AGI must be below $16,480, while the max for a married couple with 3 or more children is $59,187.
Maximum Adjusted Gross Income Limits
Dependents Claimed
Single, Head of Household or Widowed
Married Filing Jointly
0
$16,480
$22,610
1
$43,492
$49,622
2
$49,399
$55,529
3 or more
$53,057
$59,187
Maximum EITC Credits
Qualifying Dependents
Maximum Credit Amounts
0
$560
1
$3,733
2
$6,164
3 or more
$6,935
Tax Brackets Increase: Income Tax brackets went up in 2022 to account for inflation. And will increase again next year. For the 2022 tax year, the tax brackets went up a few hundred dollars to account for inflation.
2022 Marginal Tax Rates
Single Tax Bracket
Married Filing Jointly Tax Bracket
10%
$11,000 or less
$22,000 or less
12%
$11,001 to $44,725
$20,001 to $89,450
22%
$44,726 to $95,375
$89,451 to $190,750
24%
$95,376 to $182,100
$190,751 to $364,200
32%
$182,101 to $231,250
$364,201 to $462,500
35%
$231,251 to $578,125
$462,501 to $693,750
37%
$578,126 or more
$693,751 or more
Although this seems like a lot, this is only some of the major changes you will see this year. In order to feel confident completing your taxes this year, please consult with a trusted tax advisor. If your tax situation is complicated, or if you simply want peace of mind, consider hiring a tax advisor. Here at Giles Consulting, we can help ensure that your tax return is completed accurately and can help you navigate any tax-related questions or issues that you may have.
Some other tips to keep in mind this tax season:
Plan for Estimated Tax Payments: If you’re self-employed or have other sources of income that aren’t subject to withholding, you’ll need to make estimated tax payments throughout the year. These payments are used to pay your income and self-employment taxes as you earn income, instead of paying it all at once at tax time. By making estimated tax payments, you can avoid underpayment penalties and ensure that you have enough money to pay your taxes when they are due.
Keep Good Records: Good record-keeping is crucial for a successful tax season. Did you keep your receipts? Keeping receipts, invoices, and any other documents that support your income and expenses are very important come tax season. This will make it easier to complete your tax return accurately and to take advantage of any deductions or credits that you may be eligible for.
File Electronically: Filing your tax return electronically is not only more convenient, but it can also help you avoid errors and reduce your chances of a tax audit. E-filing is also a faster way to get your refund and eliminates the possibility of your return being lost or delayed in the mail.
To sum it all up, being informed and prepared for the 2023 tax season can help you avoid any stress or surprises. File your taxes with confidence in 2023 avoiding costly mistakes.
When it comes to preparing and filing your taxes, you have two main options: hiring a tax preparer or hiring a tax strategist. Both professionals can help you with your taxes, but they have very different roles and can offer different benefits.
A tax preparer is a professional who assists you with gathering the necessary documents and information to complete your tax return. Then they will use that information to fill out the appropriate forms and file your taxes. Tax preparers are often accountants or bookkeepers who have experience with tax laws and regulations. They can assist you in making sure you have all the required paperwork and can help you identify any mistakes you might have made.
A tax strategist, on the other hand, looks at your overall financial situation and provides advice on how to minimize your tax liability. They look at long-term tax planning and advise on how to maximize your financial condition to minimize your taxes in the future, rather than merely the current year’s taxes. A tax strategist can help you with understanding the tax laws and rules as well as assist you in identifying the appropriate credits and deductions.
Here are some of the benefits of hiring a tax strategist:
Tax Minimization: A tax strategist can help you identify tax-saving opportunities that you might not be aware of. They can also help you plan your finances in a way that will minimize your tax liability.
Long-Term Planning: A tax strategist can help you with long-term planning. They can advise you on how to manage your finances in order to minimize your taxes in the future.
Complex Situations: A tax strategist can help you navigate difficult tax situations, such as owning rental property or running a business. They can advise you on how to structure your finances in a way that will minimize your taxes while still complying with all the relevant laws and regulations.
Peace of Mind: Hiring a tax strategist gives you a peace of mind, knowing that your taxes are being handled by a professional who is looking out for your best interests.
In conclusion, while a tax preparer can help you file your taxes correctly, a tax strategist can help you minimize your tax liability and plan for the future. If you want to optimize your finances and reduce your tax burden, it may be worth considering hiring a tax strategist. The great thing about Giles Consulting, you get the best of both worlds. Depending on where you are in your life or your business, we have someone that can cater to all your financial needs.
Want to learn more about how our tax strategist services can benefit you?
Request a free consultation with one of our experts today.
