Do you Know That you Can Claim Casualty and Theft Losses On your Personal Tax Return?
Claim Casualty and Theft Losses ,Many people are not aware, and thankfully so, that in some instances the IRS will give a tax deduction for casualty, theft, and disaster losses relating to a home, household items, vehicles, and other tangible personal property owned by individual. If your property is destroyed, damaged, or stolen due to casualty or theft, you may be entitled to a tax deduction. A casualty is a damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, and unusual.
A sudden event is one that is swift, not gradual or progressive. It does not include damage from events such as termite infestation or deterioration from normal wind and weather.
What is a Casualty?
A casualty, for federal income tax purposes, is a sudden, unexpected, or unusual loss or damage to some property you own.
If something bad happens to your property, such as a flood, fire, vandalism or theft that is out of your control, the losses associated with that bad event are called casualty losses. Typically these bad events are sudden, unexpected or unusual. Casualty losses can be fully or partially deductible. There also typically needs to be some external force at play rather than something being lost or damaged due to your own negligence.
Casualty losses can include the following events:
Terrorist attacks
Car accident (if not caused by your negligence)
Storms and aftermath
Hurricanes
Tornadoes
Fires (as long as the fire is not arson)
Flooding
Mine cave-ins or shipwrecks
Volcanic eruptions
Vandalism
Earthquakes
Government-ordered demolition
Landslides
Oil spills
The amount you can deduct from a casualty loss depends on whether the property involved was stolen, completely destroyed or partially destroyed. It also depends on whether the property was covered by insurance.
You must reduce the deduction by the amount recovered from insurance and, if the loss is fully recovered by insurance, you do not get a deduction at all.
A theft is when someone steals your property and includes:
Blackmail
Burglary
Embezzlement
Extortion
Kidnapping for ransom
Larceny
Robbery
To claim tax relief after a casualty or theft, you must provide proof of loss. You must prove that your property was damaged from disaster or theft, and that you were the owner of the damaged assets. The IRS also needs to know whether you’ve filed an insurance claim to recover or repair your property, and whether you can reasonably expect your property to be found or fixed.
Few basic considerations that will help you while deducting any casualty or theft losses.
A casualty does not include normal wear and tear or progressive deterioration from age or termite damage.
You may not deduct casualty and theft losses covered by insurance unless you file a timely claim for reimbursement. You must reduce your loss by the amount of the reimbursement.
If your property is not completely destroyed or if it is personal-use property, the amount of your casualty or theft loss is the lesser of the adjusted basis of your property, or the decrease in fair market value of your property as a result of the casualty or theft, reduced by any insurance or other reimbursement you receive or expect to receive.
The damage must be caused by a sudden, unexpected or unusual event like a car accident, fire, earthquake, flood or vandalism.
If business or income-producing property, such as rental property, is completely destroyed, the amount of your loss is your adjusted basis in the property minus any salvage value, and minus any insurance or other reimbursement you receive or expect to receive.
Are You Planning To Incorporate a Business! Why Not an S-Corporation?
When you are planning to start a company, one of the key considerations you will have to make is what type of business entity to form. There are so many options:
Corporation
LLC
Partnership
LP
LLP, etc.
Then, within corporations there are different types as well:
C corp
S corp
Plus, each entity type comes with further differences from state to state. It can be overwhelming to wrap your head around it all. Many people are especially confused about the difference between a C corporation and S corporation.
An S corporation is a regular corporation that lets you enjoy the limited liability of a corporate shareholder but pay income taxes on the same basis as a sole proprietor or a partner.
Unlike a C-Corp, which is a more conventional type of corporation, an S-Corp is a “pass-through” entity, meaning that it does not pay any income taxes on the corporate level. Instead, it passes the income tax responsibility on to employees and shareholders who receive their income through the company.
In an S-Corp, however, the IRS requires owner-operators who have direct control over operations to allocate a reasonable salary to themselves instead of relying completely upon income through corporate ownership. As with other pass-through business owners, S-corporation owners face the similar marginal tax rates as individual wages earners. However, how much owners pay in taxes can differ based on how much they participate in the business. These businesses are only allowed to have 100 shareholders, their shareholders must be U.S. citizens.
All owners of S-corporations need to pay federal individual income taxes (top marginal rate of 39.6), state and local income taxes (from 0 percent to 13.3 percent).
No Self-Employment Tax for S-Corporation shareholders business’s profits
The big benefit of S- corp taxation is that S-corporation shareholders do not have to pay self-employment tax on their share of the business’s profits.
The big catch is that before there can be any profits, each owner who also works as an employee must be paid a “reasonable” amount of compensation (e.g., salary).
This salary will of course be subject to Social Security and Medicare taxes to be paid half by the employee and half by the corporation. As such, the savings from paying no self-employment tax on the profits only kick in once the S-corp is earning enough that there are still profits to be paid out after paying the mandatory “reasonable compensation.”
Restrictions on S Corporations
There are a few key restrictions on S corporations as well.
For one, an S corporation may not have more than 100 shareholders, and all shareholders must be US citizens or US residents. There are no such shareholder restrictions for a C corporation.
Furthermore, C corporations are allowed to divide up voting rights by issuing different classes of stock.
S corporations are limited to one class of stock, giving all shareholders equal voting rights.
Finally, some types of businesses are not permitted to become S corporations. These include banks and some insurance companies, among other business types. C corporations are usually a better choice for large businesses with their sites set on an IPO due to their greater flexibility because an S corporation is restricted to not more than 100 shareholders.
Other Taxes
While paying yourself as an owner rather than as an employee reduces the employment taxes you must pay, income that you receive as the business owner is still subject to other taxes. As partial owners of an S-Corp, shareholders must report any income they receive on the IRS 1040 form K1, which makes this income subject to dividend or capital gains taxation.
Each year the IRS assesses millions of penalties against taxpayers. Most taxpayers are unaware that post-assessment the IRS also abates many of those same penalties. During fiscal year 2013 the IRS assessed 37 million penalties against taxpayers. The IRS later abated about 5 million of those penalties. Most of those abatements occurred because taxpayers or their representatives contested the penalties. It is important for those subject to IRS penalties to know their rights to dispute a penalty assessed by the IRS.
There are over 100 potential penalties that might be asserted against a taxpayer.
The majority of the penalties however: fall into two categories: collection penalties and accuracy related penalties.
The most common collection related penalties are:
Late filing up to 25% of the unpaid taxes of the return
Late payment up to 25% of the unpaid taxes
Late federal tax deposits up to 15% of late deposits
The most common accuracy with related penalties are:
Negligence penalty up to 20% of the understated taxes
Substantial understatement penalty up to 20% of the understated taxes
For taxpayer subject to IRS penalties the IRS Penalty handbook provides a listing of the IRS’s favorite reasons for reducing penalties.
In considering non-assertion or abatement of penalties the IRS applies a standard of “Reasonable Cause”.
Most people are unaware that the IRS will consider the following as reasons it might reduce a penalty:
Death, Serious Illness, or Unavoidable Absence
Fire, Casualty, Natural Disaster, or Other Disturbance
Unable to Obtain Records
Mistake was Made
Ignorance of the Law
Forgetfulness
Statutory Exceptions or Waivers
Undue Hardship
Written Advice From IRS
Oral Advice From IRS
Advice from a Tax Advisor
Official Disaster Area
IRS Error
The taxpayers who have not had a previous delinquency the IRS generally may apply a First Time Abatement Rule upon request by the taxpayer. If taxpayer has not previously been required to file a return or if no prior penalties (except the Estimated Tax Penalty) have been assessed on the same against the same taxpayer. This First-Time Abate (FTA) is an Administrative Waiver. A taxpayer seeking an FTA must request a penalty reduction in writing.
IRS employees reviewing penalties use a computer program known as reasonable cause assistant. In other words the IRS uses artificial intelligence to determine whether to reduce a penalty. Those who specifically reference to a section of the penalty handbook are much more likely to have IRS penalties reduced.
Not all IRS employees are adequately trained in the reasons for reasonable cause.
Those taxpayers referencing the penalty handbook have a much greater chance of success than those who merely submit a statement of facts to support their request for reduced penalties. In other words those who avoid the need for an IRS employee to research reasons for penalty reduction by citing directly to the IRS manual will be much more successful than those who rely upon the IRS to properly research that manual.
To qualify for penalty abatement you must convince the IRS that you should not be held liable for this additional money. Some examples of such reasons that will give you a good chance of receiving penalty abatement include: a serious sickness; a family problem, such as a divorce; the destruction of important tax records; hiring a tax professional who gave you harmful advice; a natural disaster; or long term unemployment. If you have faced any of these issues, you have a higher chance of getting your IRS penalties removed.
What about Gifts from Foreigners in your Tax Returns?
December is a time when we think of gifts, both giving and receiving them. If you are a U.S. person who received foreign gifts of money or other property, you may need to report these gifts on Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. Form 3520 is an information return, not a tax return, because foreign gifts are not subject to income tax. However, there are significant penalties for failure to file Form 3520 when it is required.
General Rule: Foreign Gifts
In general, a foreign gift is money or other property received by a U.S. person from a foreign person that the recipient treats as a gift or bequest and excludes from gross income. A “foreign person” is a non-resident alien individual or foreign corporation, partnership or estate.
The IRS may re-characterize purported gifts from foreign partnerships or foreign corporations as items of income that must be included in gross income. Additionally, gifts from foreign trusts are subject to different rules than gifts other foreign persons.
A gift to a U.S. person does not include amounts paid for qualified tuition or medical payments made on behalf of the U.S. person.
Reporting Requirements
You must file Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, if, during the current tax year, you treat the receipt of money or other property above certain amounts as a foreign gift or bequest. Include on Form 3520:
Gifts or bequests valued at more than $100,000 from a non-resident alien individual or foreign estate (including foreign persons related to that non-resident alien individual or foreign estate);
or
Gifts valued at more than $13,258 (adjusted annually for inflation) from foreign corporations or foreign partnerships (including foreign persons related to the foreign corporations or foreign partnerships).
You must aggregate gifts received from related parties. For example, if you receive $60,000 from non-resident alien A and $50,000 from non-resident alien B, and you know or have reason to know they are related, you must report the gifts because the total is more than $100,000. Report them in Part IV of Form 3520. Treat gifts from foreign trusts as trust distributions you report in Part III of Form 3520.
File Form 3520 separately from your income tax return. The due date for filing Form 3520 is the same as the due date for filing your annual income tax return, including extensions. You file an annual Form 3520 for all reportable foreign gifts and bequests you receive during the taxable year. See the Instructions for Form 3520 for additional information. Under a new law effective June 17, 2008, gifts from individuals who ceased to be a U.S. citizens or green card holders (lawful permanent residents) on or after June 17, 2008 may be subject to special rules. Refer to the 2008 Instructions for Form 3520 for additional information.
Penalties for Failure to File Form 3520
You may be penalized if you do not file your Form 3520 on time or if it is incomplete or inaccurate. Generally, the penalty is 5% of the amount of the foreign gift for each month for which the failure to report continues (not to exceed a total of 25%).
Of all the choices, you make when starting a business one of the most important is the type of legal organization you select for your company. This decision can affect how much you pay in taxes, the amount of paperwork your business is required to do, the personal liability you face, and your ability to borrow money.
Business formation is controlled by the law of the state where your business is organized.
This fact sheet provides a quick and most common forms of business entities.
The most common forms of businesses are:
Sole Proprietorship
Partnerships
Corporations
Subchapter S Corporation
Limited Liability Companies (LLC)
While state law controls the formation of your business, federal tax law controls how your business is taxed. Federal tax law recognizes an additional business form, the Subchapter S Corporation.
All businesses must file an annual return. The form you use depends on how your business is organized. Sole proprietorships and corporations file an income tax return. Partnerships and S Corporations file an information return. For an LLC with at least two members, except for some businesses that are automatically classified as a corporation, it can choose to be classified for tax purposes as either a corporation or a partnership. A business with a single member can choose to be classified as either a corporation or disregarded as an entity separate from its owner, that is, a “disregarded entity.” As a disregarded entity, the LLC will not file a separate return instead all the income or loss is reported by the single member/owner on its annual return.
The answer to the question “What structure makes the most sense?” depends on the individual circumstances of each business owner.
The type of business entity you choose will depend on:
Liability
Taxation
Record keeping
1. Solo Proprietorship
A sole proprietorship is the most common form of business organization. It’s easy to form and offers complete control to the owner.
It is any unincorporated business owned entirely by one individual.
In general, the owner is also personally liable for all financial obligations and debts of the business. (State law may also govern this area depending on the state.)
Sole proprietors can operate any kind of business. It must be a business, not an investment or hobby. It can be full-time or part-time work. This includes operating a:
Shop or retail trade business
Large company with employees
Home based business
One person consulting firm
Every sole proprietor is required to keep sufficient records to comply with federal tax requirements regarding business records.
Generally, sole proprietors file Schedule C or C-EZ, Profit or Loss from Business, with their Form 1040. Sole proprietor farmers file Schedule F, Profit or Loss from Farming. Your net business income or loss is combined with your other income and deductions and taxed at individual rates on your personal tax return.
Sole proprietors must also pay self-employment tax on the net income reported on Schedule C or Schedule F. You may also be able to deduct one-half of SE tax on your 1040. Use Schedule SE, Self-Employment Tax, to compute this tax.
Sole proprietors do not have taxes withheld from their business income so
you will generally need to make quarterly estimated tax payments if you expect to make a profit.
These estimated payments include both income tax and self-employment taxes for Social Security and Medicare.
2. Partnership
A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill and expects to share in the profits and losses of the business.
A partnership does not pay any income tax at the partnership level. Partnerships file Form 1065, U.S. Return of Partnership Income,
to report income and expenses. This is an information return. The partnership passes the information to the individual partners on Schedule K-1, Partner’s Share of Income, Credits, and Deductions. Partnerships are often referred to as pass-through or flow-through entities, for this reason.
Each partner reports his share of the partnership net profit or loss on his personal Form 1040 tax returns. Partners must report their share of partnership income even if a distribution is not made.
Partners are not employees of the partnership and so taxes are not withheld from any distributions.
Like sole proprietors, partners generally need to make quarterly estimated tax payments if they expect to make a profit.
General partners must pay self-employment tax on their net earnings from self-employment assigned to them from the partnership. Net earnings from self- employment includes an individual’s share, distributed or not, of income or loss from any trade or business carried on by a partnership.
Limited partners are subject to self-employment tax only on guaranteed payments, such as professional fees for services rendered.
3. Corporation
A corporate structure is more complex than other business structures. It requires complying with more regulations and tax requirements.
It may require more tax preparation services than the sole proprietorship or the partnership.
Corporations are formed under the laws of each state and are subject to corporate income tax at the federal and generally at the state level. In addition, any earnings distributed to shareholders in the form of dividends are taxed at individual tax rates on their personal tax returns.
The corporation is an entity that handles the responsibilities of the business. Like a person, the corporation can be taxed and can be held legally liable for its actions.
If you organize your business as a corporation, you are generally not personally liable for the debts of the corporation. (Exceptions may exist under state law.)
When you form a corporation, you create a separate tax-paying entity. Unlike sole proprietors and partnerships, income earned by a corporation is taxed at the corporate level using corporate tax rates. Regular corporations are called C corporations because Subchapter C of Chapter 1 of the Internal Revenue Code is where you find general tax rules affecting corporations and their shareholders.
A corporation files Form 1120 or 1120-A, U.S. Corporation Income Tax Return.
If a shareholder is an employee, he pays income tax on his wages, and the corporation and the employee each pay one half of the social security and Medicare taxes and the corporation can deduct its half. A corporate shareholder pays only income tax for any dividends received, which may be subject to a dividends-received deduction.
4. Subchapter S Corporation
The Subchapter S Corporation is a variation of the standard corporation.
The S corporation allows income or losses to be passed through to individual tax returns, similar to a partnership.
An S corporation has the same corporate structure as a standard corporation. It is a legal entity, chartered under state law, and is separate from its shareholders and officers. There is generally limited liability for corporate shareholders. The difference is that the corporation files an election on Form 2553, Election by a Small Business Corporation, to be treated differently for federal tax purposes.
Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income.
It is treated in the same way as a partnership, in that generally taxes are not paid at the corporate level.
An S corporation files Form 1120S, U.S. Corporation Income Tax Return for an S Corporation. The income flows through to be reported on the shareholders’ individual returns. Schedule K-1, Shareholder’s Share of Income, Credits and Deductions, is completed with Form 1120S for each shareholder. The Schedule K-1 tells shareholders their allocable share of corporate income and deductions. Shareholders must pay tax on their share of corporate income, regardless of whether it is actually distributed.
5. Limited Liability Company
A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute.
LLCs are popular because, similar to a corporation, owners generally have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.
Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities.
Most states also permit “single member” LLCs, those having only one owner.
A few types of businesses generally cannot be LLCs, such as banks and insurance companies.
Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.
Which structure best suits your business?
One form is not necessarily better than any other. Each business owner must assess his or her own needs. It may be important to seek advice from business incorporation and tax professionals when considering the advantages and disadvantages of a business entity.
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