OC Civic 50 Honor Roll

SANTA ANA, CALIF. (PRWEB) SEPTEMBER 30, 2021

Optima Tax Relief has been named an honoree of The Civic 50 Orange County by OneOC and Points of Light, the world’s largest organization dedicated to volunteer service. The award recognizes Optima Tax Relief as one of the most community-minded companies in Orange County, California determined by an independently administered and scored survey. The Civic 50 Orange County initiative, modeled after Points of Light’s national program, provides a standard for superior corporate citizenship, and showcases how companies can use their time, skills, and resources to drive social impact in their company and communities.

The Civic 50 Orange County honorees were officially recognized at the OneOC Civic 50 Orange County Virtual Reception on September 28th, 2021.

“Our company has always been committed to investing in our community, both in and out of the office,” Christine Bui, chief customer officer, said. “Instilling awareness and establishing an efficient path to a charitable lifestyle in our employees is not only rewarding, but necessary; especially during the pandemic.”

Bui refers to the Optima employee benefits package—which includes Volunteer Time Off to make giving back during business hours fiscally possible for staff. With 20 hours a year to devote to local nonprofits, community engagement continues to soar as the company grows.

“We are so proud to be recognized as one of the most community-minded companies in OC for the fourth year in a row,” CEO David King said. “It was truly remarkable to witness the way our team was able to pivot, and match the increasing need for assistance in our community as a result of the pandemic.”

“OneOC is honored to work in partnership with Points of Light to celebrate the most community-minded companies in Orange County, “said Jessi Midstokke, community and corporate development director. Our mission at OneOC is to accelerate nonprofit success and we strongly believe that our corporate community is key to accomplishing this. Our collaboration strengthens not only our mission but enhances the longevity and sustainability of our community.”

The Civic 50 Orange County survey is administered by True Impact, a company specializing in helping organizations maximize and measure their social and business value and consists of quantitative and multiple-choice questions that inform scoring process.

For more information about The Civic 50 Orange County and this year’s honorees, visit https://oneoc.org/get-involved/community-events/the-civic-50-oc-2021/

# # #

About Optima Tax Relief
Optima Tax Relief is the nation’s leading tax resolution firm providing assistance to individuals and businesses struggling with unmanageable IRS and state tax debts. Optima’s commitment to delivering unparalleled service and results has transformed the tax resolution industry and earned the company numerous honors, including the Torch Award for Ethics from the Better Business Bureau of San Diego, Orange and Imperial Counties, and Glassdoor’s Best Places to Work. Offering full-service tax resolution and employing over 600 professionals, Optima has resolved over a billion dollars in tax debts for their clients, helping their clients achieve a better financial future by making their tax issues a thing of the past.

About OneOC
OneOC is an Orange County based nonprofit organization with the mission of accelerating nonprofit success. We are committed to making nonprofits in Orange County as efficient and effective as they are passionate about their missions. Additionally, OneOC serves as a Management Services Organization, providing solutions and support services to nonprofits and companies, helping them to make greater impact and engage with the community. We proudly build bridges between the public and private sectors to make Orange County a better place for all.

About Points of Light
Points of Light is a global nonprofit organization that inspires, equips, and mobilizes millions of people to take action that changes the world. We envision a world in which every individual discovers the power to make a difference, creating healthy communities in vibrant, participatory societies. Through affiliates in 200 cities across 37 countries, and in partnership with thousands of nonprofits and corporations, Points of Light engages 5 million volunteers in 14 million hours of service each year. We bring the power of people to bear where it’s needed most. For more information, go to pointsoflight.org.

By |Press Releases|Comments Off on OC Civic 50 Honor Roll

IRS Signs Three New Collection Agencies

The IRS recently signed contracts with three private-sector collection agencies, taking effect Thursday, Sept. 23, 2021. Taxpayers that are behind on payments toward their debts may be contacted by one of the following agencies:

  • CBE Group, Inc., PO Box 2217, Waterloo, Iowa, 50704; (800) 910-5837
  • Coast Professional, Inc., PO Box 526, Albion, New York, 14411; (888) 928-0510
  • ConServe, PO Box 307, Fairport, New York, 14450; (844) 853-4875

What to expect from a private collection agency

Should you find that you owe back taxes to the IRS, you will receive notice prior to your account being transferred to a collection agency. A letter will arrive by mail and a representative will contact you regarding your account transfer. The rep and letter should state the agency name, contact information, and include a copy of Publication 4518.

The PCA (private collection agency) assigned to your account will also send a letter of its own. This letter will be a confirmation of the account transfer and identify the tax amount owed to assure their legitimacy.

How private collection agencies work

Your assigned PCA should identify themselves as contractors collecting taxes on behalf of the IRS upon contacting you. Collection representatives must adhere to the provisions of the Fair Debt Collection Practices Act, and provide the same respectful service expected of the IRS (see Taxpayer Bill of Rights). Private agencies are not authorized to take enforcement actions against taxpayers.

Discussing payment options

While payments should never be made to an agency other than the IRS, your assigned PCA is authorized to discuss payment options with you, including setting up payment agreements. When making a payment, be sure that checks are only payable to the United States Treasury.

Additional information about private collection agencies

For more information about private debt collection, click here. Ready to speak with a representative about resolving your tax liability? Optima’s team of tax professionals are here to help! Contact us at 800-536-0734 for a no-obligation consultation today. Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

By |Tax Returns|Comments Off on IRS Signs Three New Collection Agencies

Tax Evasion, Fraud & the Statute of Limitations on Tax Crimes

Tax evasion and fraud is not just a problem for white-collar crime masterminds. Filing your taxes, particularly if you have considerable assets or run your own business, can be terribly complex. This means that the line between an aggressive – but legal – tax planning strategy and fraud is thinner than you might think.

Perfectly innocent mistakes may be interpreted by an IRS investigator as suspect. Therefore, even if you are a law-abiding taxpayer it pays to know what the difference is between tax evasion and tax fraud, the penalties, and what the IRS’ statute of limitations is when prosecuting tax crimes.

Tax Evasion vs. Tax Fraud

Although often used interchangeably, there are important differences between tax evasion and tax fraud. Tax evasion refers to the use of illegal means to avoid paying your taxes. This includes felonies, such as refusing to pay your taxes once they have been assessed, and misdemeanors, such as failing to file a return. Tax fraud, on the other hand, refers to lying on your tax return and falsifying tax documents and is always a felony charge.

Take for example celebrity-convict Wesley Snipes, who was charged with three counts of failing to file a return. Snipes was convicted for three misdemeanor charges and received the maximum one-year sentence for each count. If he had been found guilty of a felony evasion charge or of tax fraud, he could have received up to five years for each count.

What’s the Statute of Limitations for Tax Evasion or Tax Fraud?

The statute of limitations of a crime is the amount of time a prosecutor or a plaintiff has to file charges. In the case of taxes, it represents how long you should be looking over your shoulder after – willfully or otherwise – lying on your tax return.

The general rule of thumb is that the IRS has three years to audit your tax returns. If an investigation of your tax return reveals you concealed over 25% of your income, the IRS gets twice the time, six years, to file charges. However, this time period can be extended for a variety of reasons.

For instance, if you are not in the United States or you become a fugitive, the statute of limitations may be “tolled” – or stop running – until you are found or return home. Another matter to consider is when the 6-year period starts. The IRS could prosecute a series of fraudulent tax returns as a single charge and only start counting the six-year period from your last act of tax evasion or fraud.

It gets worse. Although the IRS is limited to how far back it can look when filing charges in criminal court, there is no statute of limitations for civil tax fraud. This means the IRS can look back as far as it wants when suing for civil fraud. In practice the IRS rarely goes back more than six years because it has a high enough burden of proof to meet in fraud cases without having to deal with the added difficulties of proving older charges.

Tax Crime Statistics

Let’s end with the good news. Although the law grants extensive powers to the IRS, the chances of you being charged — never mind convicted — of tax fraud are minimal. According to IRS statistics, of the approximately 240.2 million tax returns filed, less than 2,000 people were investigated for fraud in 2020. Of those who were investigated, only half were actually charged with a criminal offense. However, once the IRS charges a taxpayer, the conviction rate is high: around 93%. Tax prosecutors have a high burden of proof to meet and their resources are limited; so they tend to focus their efforts on clear-cut cases.

Another positive tidbit is that the IRS rarely brings up an original return in audits or criminal prosecutions, if you came forward and tried to correct mistakes through an amended return. This means that if you avoid blatant abuses and correct filing errors when they come up in an audit, your chances of staying on the right side of a prison cell are excellent.

Live Here, Work There. Where do I pay state income taxes?

After weeks or months of job seeking, you land the position of your dreams–but the job is in a different state. The location of the job is close enough so that you can commute every day rather than move, but you are still faced with the dilemma of where and how to pay state income taxes. Here’s what you should know if you live in one state but work in another.

Do I Pay State Income Taxes Where I Live Or Work?

The easy rule is that you must pay non-resident income taxes for the state in which you work and resident income taxes for the state in which you live, while filing income tax returns for both states.

However, this general rule has several exceptions. One exception occurs when one state does not impose income taxes. The other exception occurs when a reciprocal agreement exists between the two states.

States with No State Income Tax

There are currently seven states in the USA that have no state income tax:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming

Two more states, New Hampshire and Tennessee, tax only dividend and interest income. If you work in one of these nine states but live in one of the 41 states (plus the District of Columbia) that do impose state income taxes, you will generally pay only resident state income taxes for the state where you live. Similarly, if you live in one of these nine states but work in a state that imposes state income tax, you would only pay nonresident taxes for the state where you work.

For instance, if you live in Bristol, Virginia but work in Bristol, Tennessee, you would pay Virginia resident state income taxes. Likewise, if you worked in Bristol, Virginia and lived in Bristol, Tennessee, you would pay Virginia nonresident state income taxes. In both cases, you would only file a single state income tax return.

States with Reciprocal Tax Agreements

What if you live in Milwaukee but you commute every day by Amtrak to Chicago? It just so happens that Wisconsin and Illinois share what is known as a reciprocal tax agreement. Reciprocal agreements allow residents of one state to work in neighboring states without having to file nonresident state tax returns in the state where they work. As a result, your employer would deduct only Wisconsin state taxes from your paycheck, and none for Illinois. Likewise, if you live in Chicago but work in Wisconsin, your employer would only deduct Illinois resident state income taxes from your paycheck. In both instances, you would only be required to file one state income tax return.

States without Reciprocal Tax Agreements

If you are unlucky enough to work across state lines in a state with no reciprocal agreement with your resident state, (for instance, Illinois and Indiana), then you will need to file income tax returns for both states. However, you should also be able to claim a credit on your resident state income tax return for the state income tax that you paid for the nonresident state. The result is that you actually pay taxes for one state, even though you must deal with the hassle of filing returns in both states.

Please note that reciprocity is not automatic. You must file a request with your employer to deduct income taxes based on your state of residence rather than where you work. Unless you make a formal request, with your employer, you will continue to be taxed by both states and you will continue to be obliged to file two state income tax returns.

Filing Multi-State Income Tax Returns

Many people are faced with the dilemma of working in one state and living in another, meaning they need to file a nonresident state tax return. People living and working in two different states often delegate the task of filing state income tax returns to a tax preparation expert, an accountant, or a tax attorney. Still, know that many online and home-based tax preparation software programs include state income tax forms with detailed instructions on how to file multi-state tax returns. If your tax situation is otherwise straightforward, you can save yourself a considerable amount of money by using a software program that includes both state and federal income tax forms and filing your own income tax returns.

If your career move was international there are other tax considerations, you should be aware of. Read our article on reporting foreign income to learn about your tax obligations when working overseas.

Get Tax Help

Let Optima Tax Relief Help

Our professionals will put your mind at ease.

Get Tax Help

IRA Hardship Withdrawal: Everything You Need to Know

If you are facing financial hard times, your retirement funds begin to look like a good source of much-needed cash. In cases of dire emergency, you may indeed be able to make withdrawals from those funds before you reach retirement age. However, the potential short-term and long-term consequences can be severe. Nonetheless, if you must make an early withdrawal from an Individual Retirement Account (IRA) or 401(k), there are certain circumstances under which you can minimize the bite from Uncle Sam.

The Covid-19 pandemic and the 2020 CARES Act have made easier for taxpayers to withdraw funds from their retirement accounts. Learn more about taking a CARES Act retirement withdrawal HERE.

What are the Three Types of Retirement Funds?

There are three primary types of tax optimized retirement funds in the United States:

  • Traditional IRAs
  • Roth IRAs
  • 401(k)s

Traditional IRAs

Traditional IRAs are drawn from pre-tax earnings. When you deposit funds in a traditional IRA, the taxes on those funds and your earnings is deferred until after you retire, presumably when your income is lower and you qualify for a lower tax bracket.

Roth IRAs

By contrast, Roth IRAs are drawn from post-tax earnings. Because you pay taxes on Roth IRA deposits up front, you do not have to pay taxes on either the principle or the earnings, provided that your Roth IRA has been open for five years or longer and you are at least 59 ½ years old when you begin making withdrawals.

401K

401(k) funds are sponsored by your employer. You can invest either pre-tax earnings or post-tax earnings, with tax implications similar to those for a traditional or a Roth IRA. Many employers match their employees’ contributions dollar for dollar. The catch is that you can’t access your employer’s contributions to your 401 (k) until you are fully vested in the company, which translates to being employed or a certain length of time which varies but five years is common.

For What Reasons can you Withdrawal from IRA without Penalty?

If you are younger than age 59½, taking withdrawals from either a traditional or Roth IRA or from a 401(k) will usually trigger a 10 percent tax penalty in addition to paying any income taxes that are due. However, there are exceptions that vary depending on whether you are withdrawing from a traditional or a Roth IRA or from a 401 (k). You can avoid tax penalties from withdrawing from a traditional IRA even if you are younger than age 59 ½ for the following reasons

  • Purchasing a first home.
  • Educational expenses for yourself or a family member.
  • Death or disability of a family member.
  • Covering unreimbursed medical expenses.
  • Purchasing health insurance coverage (only if you are not already covered).

To claim one of these exceptions, you will need to complete IRS Form 5329 along with your income tax returns the following year. Even if you avoid the penalty, you will still need to pay taxes on the money you withdraw. This means that you should withdraw enough to cover your needs, plus a little extra for taxes.

Is there a Penalty for Withdrawing from a Roth IRA?

Yes, penalty-free early withdrawals for Roth IRAs apply to only two circumstances: first –time home purchase or death or disability of a family member. However, the penalty for early withdrawal from a Roth IRA only applies to earnings, since you have already paid taxes on the principle. You will also need to submit Form 5329 along with your tax return.

Can you pull money out of a 401k early?

It is possible to make early withdrawals from a 401(k). However, the IRS is especially harsh on early withdrawals from 401 (k) funds. You may make what are known as hardship withdrawals before age 59 ½ for the following reasons:

  • Purchase a first home.
  • Pay for college for yourself or a dependent.
  • Prevent foreclosure or eviction from your home.
  • Cover unreimbursed medical expenses for yourself or a dependent.

However, hardship withdrawals from a 401 (k) differ from hardship withdrawals from an IRA. You will be assessed a 10 percent penalty in addition to paying income taxes on your withdrawal. To avoid the 10 percent penalty on early withdrawals from a 401(k), you must fulfill one of the following circumstances.

  • Total disability.
  • Medical expenses that total more than 7.5 percent of your adjusted gross income (AGI).
  • Court order to give the money to a divorced spouse, child or other dependent.
  • Permanent separation from your job (including voluntary termination) during or after the year you turn 55.
  • Permanent separation at any age with a plan for equal yearly distributions of your 401(k) (once you begin taking distributions, you must continue them until you reach age 59 ½ or for five years, whichever is longer).

How do you avoid Penalty on 401k Withdrawal?

A better option than a hardship withdrawal from your 401(k) may be to take a loan against the value of your 401(k) with an outside lender. The lender places a lien against your 401(k) which remains in place until you repay the loan. Your funds remain in your 401(k), safe from the reach of Uncle Sam. However, if you default on the loan, the lender will have the right to seize your 401(k) to collect payment.

Is it bad to withdraw from IRA?

It should be clear that IRA and 401k withdrawal should be considered a last resort. Even if you avoid tax penalties, you are depleting the available funds available for your retirement so in this sense, it is a bad idea and if can avoid it, you should. If you must borrow, borrow enough to cover your obligations plus taxes, and repay the funds as quickly as possible. After all, you are actually repaying yourself – and your future.

Need to speak with a licensed tax professional? Optima Tax Relief provides a comprehensive range of tax relief services. Schedule a consultation with one of our professionals today.

Reporting Foreign Income To The IRS: What You Need To Know

You may live or work abroad, but if you are an American citizen or legal permanent resident, Uncle Sam still wants his rightful share of your income. Even if you reside outside the United States and receive earnings from a source located outside the United States, you must report that income.

Depending on your circumstances, you may have to pay taxes both to the government where the company from which you earned your income is located and to the Internal Revenue Service. However, in some cases you may receive tax credits or tax exclusions for some or all of your foreign income.

The details of reporting foreign income vary according to individual circumstances. Nonetheless, there are general guidelines for nearly everyone who receives foreign income.

Foreign Income Tax Credit

If you are taxed by the country from which your income is earned and that country has established a tax treaty with the U.S., you may be able to claim the Foreign Income Tax Credit. This credit was designed to help you avoid double taxation and allows you to claim a credit for income tax that you have paid to a foreign government. The intended net result of the tax credit is to ensure that the total income tax that you pay is no more than the highest result that you would have paid to a single government.

If you hire an accountant or a tax attorney to figure your taxes, he or she will undoubtedly apply the Foreign Income Tax Credit on your income tax return. Some tax preparation software programs also include provisions to calculate the Foreign Income Tax Credit if it applies to you. If not, choose a different tax preparation program.

Foreign Earned Income Exclusion

Do not confuse the Foreign Earned Income Exclusion with the Foreign Income Tax Credit. The Foreign Earned Income Exclusion is designed to allow American citizens and legal residents who reside outside the country to exclude most or all of the income earned from foreign sources from their federal income tax liability. The amount of the exclusion varies each year; for 2013 the maximum exclusion was $97,600 per individual taxpayer. Married couples could conceivably claim a larger exclusion.

The Internal Revenue Service has established strict guidelines for taxpayers who wish to claim the Foreign Earned Income Exclusion for a given tax year. Taxpayers must meet all the guidelines listed below to qualify for the exclusion.

  • Must have foreign earned income
  • Must have established a tax home in a foreign country
  • Must pass either the bona fide residence test or the physical presence test

The bona fide residence test requires that you are a bona fide resident in a foreign country for a period that includes at least a full tax year. The physical presence test requires you to be physically present in that foreign country for at least 330 days during a single 12-month period. You need not be present for 330 consecutive days, however.

foreign money

U.S. Government Employees Living Overseas

Income earned by employees of the United States government, including military personnel on active duty, does not qualify for the Foreign Income Credit or for the Foreign Earned Income Tax Exclusion, even if the income was earned overseas. However, spouses of government employees who earn income from foreign sources may be eligible for either the Credit or the Income Exclusion. It is necessary to consult with an attorney or accountant who specializes in this subject with specific questions about your particular circumstances.

Foreign Income Earned While Living in the United States

If you reside within the United States full time, in most instances, you must report income earned from foreign sources on your federal income tax return, even if you are taxed on that income by the foreign government. This requirement pertains to earned and unearned income. Self-employed workers who earn income from foreign clients must also report their foreign earnings on their federal income tax returns.

No W2 or Form 1099? No Excuse

The requirement to report foreign income applies even if you do not receive a W2 Form, Form 1099 or equivalent form from the foreign income source. It is your responsibility to provide an accurate calculation of your income by calculating payments from pay stubs, wire transfer records, dividend reports, bank statements or PayPal monthly statements.

Once you calculate your foreign income, you must combine it with any domestic income you have earned in order to calculate the adjusted gross income to be included on your federal income tax return. Failure to report foreign income is considered tax evasion, and if you are caught, the consequences could be dire. You could be hit with hefty fines or even face jail time.

Need to speak with a licensed tax professional? Optima Tax Relief offers a comprehensive range of tax relief services. Schedule a consultation with one of our professionals today.

What Is the Statute of Limitations to Collect Back Taxes?

The IRS is working with taxpayers to help them settle their tax debt. The statute of limitations on back taxes helps rid people of tax debts by placing a time limit on when the IRS can seek payment on a debt. After that time is up, the IRS can no longer attempt to settle the debt.

Does the IRS forgive tax debt after 10 years?

Yes, the statute of limitations on tax debt is ten years, beginning from the initial tax assessment. At the end of ten years the person is completely free of the debt.

Can the Statute of Limitations be extended?

There are some stipulations that can make those ten years spread out to an even longer period of time. Here are some reasons you may have an extended tax statute of limitations:

  • If you agree to an extension, your statute is placed on hold until that extension time is up.
  • If you file bankruptcy, your statute is placed on hold until six months after the bankruptcy and court proceedings have been finished.
  • If you leave the country for at least six months, the statute is placed on hold until you decide to return.
  • If you are making payment installment arrangements or request innocent spouse relief, the statute is placed on hold until the final decisions are made.

Also, in the case of civil tax fraud or evasion, the IRS can go back as far as it wants–the statute of limitations doesn’t apply. They must get you to agree to any extensions or payment installment set up before they can continue to pursue you, and you will have to sign a waiver. Before you sign, be sure you understand what it is you are signing!

Why does the Statute of Limitations Exist?

The statute of limitations was put into place to give people a much-deserved break, and a chance to be free from tax debt. It is important to know if it will benefit you and your current situation, before signing any documents or agreeing to an installment plan.

Optima Tax Relief professionals provide a range of comprehensive service for your tax issues. Book a consultation with us today to learn more about how we can help you.

Renting out a spare room and taxes – everything you need to know.

Tax Tips For Landlords

If you have decided to join the sharing society and rent out a room or part of your home, either through a service like AirBnB or independently, you should inform yourself about the implications of renting out a room and taxes.

Renting a room requires some work up-front, and ongoing management. You have several tasks ahead of you. You will most likely want to spruce up the place with comfy furnishings and linens, and maybe a fresh coat of paint. Check the legal regulations for renting in your local area, you may discover there are limitation on the type of rentals you can offer, be they short-term or long term.

And then, there’s landlord tax. Running afoul of the IRS can potentially wipe out any financial gains you may reap from opening your home to complete strangers – be sure to abide by the laws of landlord tax. Fortunately, you can reduce your potential tax bite with diligent record keeping. Here is everything you need to know about renting out a room and taxes.

Do I have to pay taxes if I rent out a room in my house? – The 14 Day Rule

The most convenient and potentially lucrative scenario would be to completely avoid reporting or paying income taxes on the income you earn from renting out your couch or your spare room. Well, you can, if you meet two relatively easy requirements set by the IRS.

First, you must use the residence as a home at least 14 days out of each calendar year. Second, you must limit the time that you rent any part of the residence that you use as a home to 14 days or less each tax year. That’s it.

So if you have a primary residence plus a vacation home where you spend at least two weeks of the same year, you could rent out rooms in both and collect rental revenue for 28 days (14 days for each residence) completely tax free. It gets better: the IRS places no upper limit on how much income you earn as long as you don’t exceed 14 total days of rental per property. (IRS.gov)

If you live near the town where the All-Star game for a major sport is being played that year, you could rent out one room or the entire place for the week, rake in major cash and never report a dime on your tax return. Pretty sweet. But if a renter burns a hole in your floor, you are stuck paying for the repairs.

What happens if I use my rental property more than 14 days?

Should you exceed the 14-day threshold, matters become somewhat more complex. First, you must determine whether you or one or more family members resides in the residence or uses it for personal purposes for at least 10 percent of the time that you rent at fair rental price. You don’t have to be there at the same time you’re renting, but your time in the residence must equal at least 10 percent of the total rental time. So if you rent out your vacation home for 300 days each year, you or another qualifying person will need to live there for at least 30 days during the same year for the IRS to qualify the residence as a home. For the purposes of this article, the assumption will be that the residence qualifies as a home for IRS purposes. (IRS.gov)

The rules differ for rental properties that are used for what the IRS calls “personal purposes” rather than as residences. There are also different regulations that apply if you use the rental property as a residence, but don’t live there enough of the time for the residence to qualify as a home. To sort out those types of issues, consult with a professional such as an attorney with Optima Tax Relief.

What IRS forms are needed for rental property?

As a contractor with AirBnB living within the United States, you would complete Form W-9, Request for Taxpayer Identification Number and Certification. You would also receive Form 1099, Miscellaneous Income before you file your federal income tax return for the following year. (International contractors complete different forms.) If you operate as an independent, you will need to maintain your own records for rental income and expenses, preferably separate from your personal household expenses.

If you provide sleeping space, but no frills, report income and losses on Schedule E, Supplemental Income and Loss, attached to Form 1040, Form 1040NR or Form 1041. If you splash out on fluffy towels, turn-down service, and catered breakfast in bed for your guests, report income and expenses through Schedule C, Profit or Loss from Business, also filed with Form 1040, Form 1040NR or Form 1041.

In either case, you are also allowed to deduct the costs of repairs, depreciation (by filing Form 4562, Depreciation and Amortization), uncollected rents and actual operating expenses. But if a renter trashes the place and you file Schedule E, you will also need to complete Form 6198, At-Risk Limitations or Form 8582, Passive Activity Loss Limitations. If you’re not sure which form you should complete, consulting a tax professional is your best strategy.

What is considered fair rental price and how is it calculated?

If you live in the heart of Manhattan or in a condo overlooking Lake Michigan in Chicago, you might think that setting your rents at bargain basement levels would help you beat the competition. If you set your prices too low, you may well attract the unfavorable attention of the IRS.

That doesn’t mean that you must charge exactly what every other landlord or private renter in your area charges for rent. It does mean that you must set prices for your rental that are comparable to the going rent for similar properties in your area – what the IRS calls “fair rental price.”

If you fail to charge fair rental prices or if you never report a profit from your rental, the IRS may decide that you’re not serious about making money. You don’t have to show a profit every year, but he IRS assumes that you have a genuine profit-making motive if you show gains during at least 3 of the most recent 5 years, including the current year. (IRS.gov)

The Hobby Loss Rule

If you fail to show profit you could you could be hit by the so-called “hobby loss rule,” which prevents you from using losses related from your venture to offset other income on your federal tax return. Instead, you use must losses related to your rental activities as itemized deduction on Schedule A. Deductions would be limited to the following strict limitations.

  • Deductions such as mortgage interest and taxes are allowed in full
  • Deductions like advertising, insurance and premiums are allowed only to the extent that gross income exceeds deductions from the first category
  • Deductions such as depreciation and amortization are allowed only to the extent that gross income exceeds the amount of deductions taken for both of the prior two categories.

Participating in the Sharing Economy

Knowing the ins and outs of renting out a room and taxes can be tricky. However, this article is not intended to discourage you from renting out a room in your home, being a live-in landlord, or otherwise participating in the sharing economy. It’s a potentially exciting way to meet interesting people from all over the country or even other parts of the world.

But just as you want your house or apartment to look its best, you’ll also want your financial house to be in order, too. That way you can concentrate on being the best host you can be, without being hit with unpleasant surprises at tax time.

Need some help with landlord tax? Consult one of our tax professionals to learn more about renting out a room and taxes.

Corp vs LLC – Which One is Right for You?

When you first went into business, you may have operated as a sole proprietor or as a partnership. However, as your operation has grown, a more formal business structure has become necessary.

Depending on your personal circumstances and the nature of your business, you may reorganize as a limited liability company, or LLC, an S-corporation, or a C-corporation. Each business structure has advantages and disadvantages concerning taxes and liability for adverse legal and financial circumstances.

What is an LLC?

LLCs are simple to organize and run. The owners (known as members) of an LLC can distribute revenues generated by the company among themselves — there are no shareholders demanding dividends. LLCs also provide a shield against legal liability for adverse actions taken against the company.

In plain English: if your LLC is sued, you won’t lose your shirt (or your house, car or any personal possessions that are not tied to the LLC as collateral) if the person filing the suit wins in court.

However, the Internal Revenue Service does not recognize LLCs as separate entities for federal income tax purposes. Each member of an LLC pays individual federal income taxes on any revenue received from the LLC. In addition, revenue generated by an LLC is also subject to self-employment taxes.

Why Would You Choose an S-Corporation?

In many ways, S-corporations represent the best of both worlds. If an S-corporation is sued, its officers are generally shielded from personal liability. This is because S-corporations, like C-corporations, are technically owned by shareholders who entrust officers (such as a CEO) to run the company in the best interests of those shareholders. As a result, the IRS considers S-corporations to be separate tax entities. Officers of S-corporations are also exempt from self-employment taxes. Also, S-corporations are exempt from the double taxation that the IRS imposes on C-corporations.

However, the IRS limits S-corporations to 100 or fewer shareholders. Non-resident aliens cannot be shareholders in an S-corporation. Certain types of companies, such as insurance agencies, are not allowed to organize as S-corporations. In addition, profits from S-corporations that are not distributed as income to officers must be distributed as dividends to shareholders.

What is the Benefit of a C-Corporation?

When people refer to “corporations,” in most cases, they are referring to C-corporations. Like S-corporations and LLCs, C-corporations shield officers from financial and legal liability for the actions of the corporation. The IRS also considers C-corporations to be separate entities for tax purposes, which means that the officers of C-corporations are not subject to self-employment taxes.

However, much of the revenue that C-corporations is subject to double taxation – taxed once through corporate income taxes and again when profits of the corporation are distributed as dividends to shareholders. As separate tax entities, C-corporations must file separate income tax returns to the IRS. In addition, shareholders must declare dividends as personal income on their individual income tax returns.

Corp vs. LLC – Which is Better for Taxes?

In considering whether to organize as an LLC, S-corp or C-corp, consider whether flexibility, exemption from self-employment taxes or avoiding double taxation is more important. If you want flexibility in operating your company, an LLC is a good option. If avoiding both self-employment taxes and double taxation is your main goal, and if your company is eligible, consider forming an S-corporation. For larger companies, organizing as a C-corporation is almost always a necessity. However, you should consult with an attorney or CPA who specializes in corporate tax law before making a final decision.

Looking for some assistance with your taxes? Optima Tax Relief offers a range of professional tax services. Consult with one of our licensed professionals to learn how we can help you today.

What Does IRS Code 9001 Mean?

There are still many IRS terms and codes that are a mystery to the average taxpayer. Tax terms can be confusing, whether you’re a first-time tax filer or have been filing tax returns for years. IRS Code 9001 is a common error code, but many people don’t know what it means. We’ll explore what the IRS Error Code 9001 is, and how to avoid it.

IRS Code 9001

You filed your federal income tax return a while ago and you are expecting a refund. You can check the status of your return and your refund check (for paper returns) or direct deposit (for electronic returns) at the IRS.gov website. The “Where’s My Refund?” portal also provides an estimate of when you should expect your refund.

If you receive an error code such as IRS Code 9001 when you check the status of your return, you may worry that your return has been flagged for an audit. Relax. In fact, IRS Code 9001 is one of an entire set of codes that are included within the Internal Revenue Manual, or IRM, which is the set of guidelines used by the IRS. This is not an audit flag, but rather an error code generated when taxpayers attempt to access return or refund results using the wrong Social Security number or TIN.

Where’s My Refund?

The IRS established the “Where’s My Refund?” portal to allow taxpayers to check the status of their federal income tax return and refund. To access the portal you need three pieces of information: your Social Security Number or Taxpayer Identification Number (TIN), your filing status and amount of the refund that you are expecting. This refund amount should be listed in whole dollars and must match the amount listed on your tax forms exactly.

Taxpayer Identification Number (TIN)

Most taxpayers include a Social Security number on their tax returns. But certain taxpayers, such as resident and nonresident aliens, are not eligible to get one. The Taxpayer Identification Number (TIN) is designed to allow individuals to file federal and state income tax returns, without an SSN.

How To Fix a IRS Error Code 9001

In most instances, when you check the status of your return on the “Where’s My Refund?” portal, you will receive a message stating that your return is being processed or that your refund is on its way. Occasionally, you may receive one or more error codes, including IRS Code 9001: “Taxpayer accessed Refund Status using a secondary TIN. Refund Status could not be returned. Get a Primary TIN Analyze account and follow appropriate IRM.” The fix is simple – enter the proper Social Security number or TIN into the “Where’s My Refund?” portal. If you still receive error messages, contact the IRS or an expert such as an attorney with Optima Tax Relieve for further assistance.

Wondering where your tax refund is? Read our dedicated blog to learn more. If you need tax help, contact us for a free consultation.