This must have been a fairly simple transaction … it’s those columns (f) and (g) that get complicated for some capital assets … mine are buildings plus equipment, so there’s recapture, depreciation, improvements, involuntary conversions; depletion for the timber I harvested … business assets removed for personal use has to be taken into consideration … the bitch is only some asset classes can be lumped together by year, others have to be calculated per individual piece … I’m looking at several Form 8949’s for just the one business …
However, I agree the forms and worksheets are pretty straightforward, and the instructions to fill out the forms are clear … there’s just a lot of steps, and one little mistake will bring down the ire of the IRS, and who wants that … I’ll be hiring a CPA just because there’s so much money involved plus most likely this will be an installment sales kind of deal …
Yes, although generally things like parking spaces and snacks at work aren’t included. And there are other exceptions like health insurance.
If you are compensated for work in something other than money, then you owe taxes on the fair market value of the goods/services you obtained instead. Of course, there’s plenty of cheating on this, both because it’s easy to underestimate the market value of something you’ve received, and because it’s a lot harder for the IRS to track goods and services than money flows.
If this sort of income weren’t taxed, there would be a tremendous incentive to move to a barter economy.
Re: providing you with lodging, there are exceptions. But it has to meet certain IRS tests. E.g. if it’s for the convenience of the employer (say housing an on-call maintenance crew), it might not be taxable. A perk for VPs? Maybe not.
The big tax dodge here used to be company cars. That’s all gone now and they are fairly heavily taxed, with the highest taxes on the most polluting cars. It is still possible though, for a company director to take most of their income as dividends which are taxed at a lower rate; they can also employ their wives as “assistants/PAs” at a salary just under the minimum taxable rate (£10k atm). This then shows up as a deductible expense.
I guess it’s true the world over - the more money you have; the more ways there are to keep hold of it.
Canada also has a provision for “taxable benefits”. Anything your employer gives you is taxed as wages at “fair market value” - company car, housing, etc. Canada does not have a gift tax, but something received because you are an employee, from your employer is income, not a gift.
There was an episode back in the 80’s S&L scandal, when small institutions in Canada were also folding; there was one small financial institution that required its upper managers to buy significant stock in the company so they would have a reason to ensure the company did well. They would even loan the manager the money to buy that stock - several hundred thousand dollars, and the added benefit, the longer you worked there, the more of the stock was paid off and added to your capital assets. Except, when the shares tanked, they weren’t worth 1/10 of what they were originally and those employees were screwed. They couldn’t sell since the stock was collateral for a loan they could not afford to pay off; the company was under bankruptcy protection, so it could not buy back the stock above market price; and if they forgave the loans, it counted as taxable benefit and the employees would owe hundreds of thousands in tax.
When Margaret Thatcher came to power in Britain the top marginal tax rate was 83%. I recall an article discussing salaries - since so much of income was taxed and at the time, benefits were not - it was cheaper over there to give higher up employees perks like a car and driver than to pay the extra salary that would give them an appreciable raise.
Here’s a dirty little trick you can pull along these lines … if you loan someone money and they won’t pay you back, and it’s not enough money to bother with the court system … you can “cancel” the debt, they don’t have to pay you back … then file a 1099-C with IRS for the cancelled amount …
Yup, them gonna have to pay income taxes on the cancelled amount … or them gonna get an IRS audit … hahahahahaha … the typical person who doesn’t pay back loans cheats on taxes as well …
The accounting 101 course I took in college was a night course taught by an accountant with a major accounting firm. he told the story of a guy who was VP at some construction firm - pulled the usual “approve fake invoices from assorted jobs” routine since he was able to approve the invoices from construction sites. As usual, he got caught when he went on vacation. Normally the invoices would wait, but some bright secretary asked one of the engineers “you were just transferred in from this job site, can we pay this invoice?” He realized the company had no involvement in the job, and the investigation concluded the (ex)VP had probably ripped the company off for about $1M in assorted fraudulent charges. there was no hope of getting the money back, so they simply reported to Revenue Canada his income of $1M and let him deal with them.
That being the case, you can much more easily accomplish the same thing by taking all your salary in cash and investing some of it in any capital asset that you want to.
Yes, if you invest in say, rental property real estate, you would depreciate the building (not the land) and that would be deducted from the income it generates. Then, if I remember my accounting: you buy a house for $200,000 and over the years write off $50,000 as depreciation. That’s deducted from your taxable income. Then, IIRC, you can sell the building and any profit over the depreciated value ($150,000) is capital gains. Plus, since you may have borrowed some of the initial investment, the interest on that mortgage is also deductible.
And the only thing it costs you is the headache of managing a rental property.
The risk of simply calling all your personal expenses “business expenses” for the favorable tax treatment is that your corporation or LLC becomes your alter ego, and you can be held personally liable for judgments against it.
This isn’t true. There is no limit on the surplus maintained by a reinsurance company as far as I can tell. There are minimum surplus amounts required to be maintained by reinsurance companies, but not maximum.
The profit over $150k is ‘capital gains’ but there’s an add on charge for the amount of it caused by the decline in the basis from $200k to $150k. That’s called depreciation recapture, and intended to make up for the difference that the depreciation each year saved taxes at the ordinary income rate ie not allow the advantage you suggest. Although, there’s still a time value of money advantage to have depreciation shield ordinary income now, and only pay recapture on it when you sell years from now. Also a feature of the tax code related to rental properties, a ‘1031 exchange’, allows for the gain on sale of one property to be rolled forward into a basis reduction on a subsequent property bought within a time window of when the first one was sold, if the second one has a higher value (among other hoops to jump through), further deferring recognition of the gain. That’s not true of asset sales in general.
When you hear the suggestion that you could form a C-corp or LLC and the profit would be taxed as capital gains, keep in mind that there are two significant down sides to this plan. First, (as others pointed out here) you might be shooting yourself in the foot when it comes time to collect your Social Security check because they don’t give you benefits the income you got from capital gains. If you don’t pay the SS tax, you don’t get the SS benefits. Second, if you own the corporation and you do work for the corporation, then you are an employee and the corporation legally has to pay you for your services, taking out the appropriate taxes, and you could be right back where you started. There’s two ways this can bite you. In nearly all cases in the US you have to comply with FLSA which means you have to pay yourself at least minimum wage times the hours worked (with time and a half for overtime) and take out taxes including SS tax and income tax. But that’s not all. My accountant tells me that it’s illegal to pay yourself just minimum wage and take the rest of the profit as capital gains unless you can justify that the amount of your salary is “reasonable”. Ask yourself if it’s reasonable to pay the CEO minimum wage. One definition of “reasonable” is what other people who have similar jobs are getting paid for their work. It’s a huge red flag if you have other employees and you pay them more than you pay yourself.
Let’s imagine that you work as an engineer, making $90K per year salary (which costs your employer $97K with payroll taxes added on), and your take-home is about $76K. You convince your employer to let you quit so you can start your own C-corp called “N. J. Nearing, Inc.” whom your old employer hires as a subcontractor. You do the exact same work you did before and they pay N. J. Nearing $97K per year. Now what? As the CEO of N. J. Nearing, you decide to pay yourself a salary of $40K and take the remaining profit as capital gains. But N. J. Nearing now has additional obligations. The company has to kick in payroll taxes, on top of your salary, to the tune of about $3K. And you have to pay an accountant to file your taxes. And you have to pay filing fees with the state. So that’s about another $1,000. When the dust settles, you end up with about $79K in your pocket, which is $3,000 more than what you took home from your job originally. Then while you’re patting yourself on the back, the IRS decides to audit your corporation. The auditor informs you that $40K is not a “reasonable” salary for the CEO of an engineering firm, especially considering that you have already established that the work you do has a fair market value of $90K. So then the IRS makes you retroactively pay yourself a salary of $90K, and you have to give back the $3,000 you pocketed, but you’re still out the filing fees and the accountant’s fees. Then on top of all that the IRS charges you interest and penalties.
Then the IRS goes after your former employer and determines that you do the exact same job in the exact same way as you did before and they fine your old boss for failure to withhold your income tax. Now your old boss is mad at you and everyone has lost money. Except for the accountant and the paper pushers; they all came out ahead in this fiasco.
Or you might get lucky and the IRS won’t ever discover that you’re breaking the law by not paying yourself a reasonable salary. You might get away with it for years, even decades. Do you feel lucky?
You can’t do that. Like, you can’t simply reduce retained earnings, pay them to a shareholder, and the shareholder call it capital gains. The other parts you mention about a reasonable salary are true, but are typically done to avoid payroll taxes. A company can take retained earnings and distribute them to shareholders as dividends which are also taxed.
Yeah but qualified dividends have a tax rate of only 15% for most taxpayers, so the difference between dividend income and capital gains is kind of a distinction without a difference as far as income taxes goes.
Wow! HMRC haven’t yet caught on to the idea of taxing criminals on their ill-gotten gains. The state can seize any assets they bought from the proceeds of crime, but hitting them with a tax bill on top would be a great idea. Maybe I should suggest it…
My point was, AFAIK, you can’t depreciate stocks. Real Estate is the only investment where (as rental property) it pays for itself, can be depreciated somewhat, and (usually) appreciates over time. Plus if you only put down the down payment and borrow the rest, it is easier to leverage than if you tell the bank you want to borrow several hundred thou to play the stock market.
I’m curious. What kind of travel benefits. Because airline employees and certain members of their families get benefits which are not taxed as far as I know. They are free travel on the employing airline and reduced cost travel on others, on a standby basis. There are contracts between airlines for this, and organizations like Star Alliance are covered also.
Trying to achieve Capital Gains can be risky. At the heart of it, you are intending to purchase shares of stock and hold them for a specific length of time before you sell them in order for them to be taxed as Capital Gains instead of Ordinary Income.
In large companies which offer huge stock options to top executives, they have the choice of exercising the options and doing what is called a “same day sale”. In that case, they sell the stock the same day they decide to exercise the stock. But that is taxed as Ordinary Income. If the executive instead purchased the stock at the exercise price and held on to it, I think it is still a year, they would sell it and pay only Capital Gains on it which is a lower tax than Ordinary Income. However, the executive takes considerable risk in doing this, because the stock’s fair market value could be less than the exercise price. Worse case, it could be almost worthless.
Given the above, the same would have to be duplicated in a small business, likely a company that is Incorporated and has share holders. There would have to be stock issued and held by the owner of the company. It couldn’t be just on paper where it is written “John Smith owns 5% of XYZ Inc.”, the company would have to issue the stock and since it isn’t publicly traded it might have to be stock certificates. I don’t know if non-publicly traded companies can have their shares held with a brokerage house for them to act as agent.
But this might be a lot of accounting work for little to no gain and assuming risk in the process. In reality small business owners already get a lot of tax breaks and have much more control over things than those working on a W2 as an employee.
One of the perks, is for the company to create an additional classification for upper management, and have most costs paid by the company which usually aren’t available for the regular employees. Such as 100% of health insurance premiums are paid by the company. This is an expense to the company, and no cost to the employee. They can offer much more elaborate and generous retirement plans similar to 401(k) with higher matching than what the rest of the employees don’t get.
When Mitt Romney was running for President he revealed his financials and it showed he was only paying 15% federal income tax, and this is because his income was all from Capital Gains. But he was a share holder in companies and held on to the stock shares for over a year in order to qualify to the IRS to only pay Capital Gains on the income.
