When looking into the net worth of a business or individual, one of the first couple of things we look at are assets and liabilities. Assets are resources or properties owned by an individual, organization, or entity that have value. They can be used to generate future economic benefits. Real estate, vehicles, cash, inventory, intellectual property, software and licenses are assets. Deferred tax assets, on the other hand, are items that can be used to lower a tax liability. Here we will review what a deferred tax asset is and how it works.
Financial Reporting vs. Tax Reporting
Before diving into deferred tax assets, it’s important to first understand how financial reporting differs from tax reporting. Financial reporting tracks information through balance sheets, income statements, and statements of cash flows. These statements give stakeholders a good idea of a company’s financial position, performance, and cash flow. Tax reporting, on the other hand, involves calculating and reporting a business’s taxable income and tax liability to the relevant tax authorities.
Financial reporting focuses on the accrual basis of accounting. Revenues and expenses are recognized when earned or incurred, regardless of when cash is received or paid. It aims to provide a comprehensive and long-term view of the financial performance and position of a company. Tax reporting generally follows specific rules related to the timing of revenue and expense recognition for tax purposes. Depending on the tax laws, revenue and expenses may be recognized differently from financial reporting. For example, certain expenses may be deductible for tax purposes when paid, even if they are not yet recognized as expenses under financial reporting.
What is a deferred tax asset?
A deferred tax asset is an item on a balance sheet that was created by overpaying taxes or paying it off early. It usually represents a difference between the company’s internal accounting and taxes owed. If taxes are not yet recognized in an income statement, sometimes because of the accounting period used, a deferred tax asset can emerge. Another example would be how a company depreciates its assets. Changing the method or the rate of depreciation can result in overpayment of taxes.
Why do deferred tax assets exist?
Deferred tax assets allow individuals and businesses to reduce their taxable income in the future. One simple example would be a loss carryover. Since businesses are able to use a loss to reduce their taxable income in later years, the loss can essentially be viewed as an asset. Deferred tax assets never expire. That said, they can be used whenever it’s most convenient for the business. This is as long as they are not applied to past tax filings.
How are deferred tax assets calculated?
Calculating a deferred tax asset can vary depending on the type of asset. For example, let’s assume a business uses a depreciation rate of 20% for tax purposes, but 15% for their own accounting purposes. If their taxable income is $10,000, they would pay $2,000 (20% of $10,000) to the appropriate taxing authority. However, the taxes on their income statement would be $1,500 (15% of $10,000). The difference in actual tax paid and the tax reported on the income statement is a deferred tax asset on their balance sheet, or $500 ($2,000 – $1,500).
In another example, there may be some expenses that a business records on their income statement but not on their tax statement because they are not able to. This would result in more taxes actually paid and a deferred tax asset on the balance sheet.
Should I have deferred tax assets?
Deferred tax assets represent tax benefits that can be used to offset taxes owed in the future. It’s important to note that deferred tax assets are also not always guaranteed. If a company experiences financial difficulties or does not generate enough taxable income in the future, the deferred tax asset may not be used. Additionally, deferred tax assets must be periodically reviewed to ensure that they are still valid and should not be written off. It goes without saying that deferred tax assets can get very complicated. However, Optima Tax Relief has over a decade of experience helping taxpayers with the toughest tax situations.
Most people dabble in gambling at some point in life. It might look like a day at the racetrack, a quick stop at the gas station for a lottery ticket, or a weekend in Las Vegas. The IRS views all these activities as gambling, among many others. More importantly, the IRS wants everyone to know that all gambling winnings are considered taxable income. In this article, we’ll break down how gambling winnings are taxed, how to handle taxes if you gamble professionally, and how to deal with gambling losses.
Gambling Winnings are Taxable
Any winnings you receive from gambling, whether small or large, are considered taxable income and must be reported to the IRS. This is true whether the payer reports the winnings or not. If the payer does report your winnings to the IRS, they will do it through Form W-2G, Certain Gambling Winnings if:
Winnings (not reduced by the wager) are $1,200 or more from bingo or a slot machine
Winnings (reduced by the wager) are $1,500 or more from a keno game
Winnings (reduced by the buy-in) exceed $5,000 from a poker game
Winnings (except for bingo, slot machines, keno, or poker) reduced by the wager are $600 or more, or at least 300 times the wager
Winnings are subject to federal income tax withholding
It should also be noted that other gambling winnings not reported are also taxable. This includes the fair market value of any prize won, such as a car or vacation. All gambling winnings must be reported as other income on Form 1040 during tax season.
Reporting Winnings as a Professional Gambler
If you gamble as a means of regular income, you’ll instead file a Schedule C as a self-employed individual. What makes this different from reporting your winnings on Form 1040? The main difference is that those who gamble for a living can deduct your costs of doing business using Schedule C to reduce your taxable income. This includes:
The cost of magazines, periodicals, or other data you use in relation to your gambling
Some of your internet expenses if you place bets online
Meals and travel expenses for tournaments
It does not include deducting your losses that exceed your winnings. On top of that, you will need to pay self-employment tax on your winnings. If you gamble professionally, be sure to keep good tax records for an easier filing process later.
Deducting Gambling Losses
You can deduct gambling losses as long as they do not exceed your winnings. However, in order to do this, you will need to itemize your deductions. That said, it’s not beneficial to try to deduct your losses if itemizing your deductions will yield a larger tax liability than taking the standard deduction. For example, if you won $1,000 while gambling but lost $3,000, you may only deduct $1,000 when itemizing. You will need to claim $1,000 in income on your Form 1040 and then deduct $1,000 when you itemize using Schedule A.
What if I don’t report my gambling winnings?
Failure to report gambling winnings or attempting to evade taxes can have serious consequences. Penalties for non-compliance can range from monetary fines to legal action, including criminal charges. It is crucial to maintain accurate records of gambling activities, including wins, losses, and related expenses, to ensure compliance with tax laws. Remember, staying informed and fulfilling tax obligations will help you enjoy your gambling pursuits while avoiding any potential legal or financial repercussions. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
A passport is an essential travel document that allows individuals to explore new horizons, visit foreign lands, and experience diverse cultures. However, the privilege of holding a passport comes with certain responsibilities, one of which is fulfilling your financial obligations to the government. In this blog article, we will explore the question of whether you can obtain or renew a passport if you owe back taxes.
Understanding Passports and Tax Obligations Most people are quite shocked to learn that back taxes can affect your ability to obtain or renew a passport. The IRS’s control over this privilege is just another method they use to encourage taxpayers to remain compliant. If the IRS deems your tax debt “seriously delinquent,” they have the authority to notify the State Department, who can then revoke your passport, or deny your passport application or renewal. This action will not come as a surprise. If the IRS plans to contact the State Department about your back taxes, they will let you know with IRS Notice CP508C. The Department of State will also notify you in writing of their plans to revoke your passport or deny your passport application.
“Seriously Delinquent”
According to the IRS, any tax debt that totals more than $55,000, including interest and penalties, is considered seriously delinquent. By this point, an individual likely has been levied and a notice of federal tax lien has been filed.
How can I get this action reversed?
Like many other consequences of not paying your taxes, the fastest and easiest way to reverse this action is to pay your tax debt. However, even paying your debt down so it falls below the “seriously delinquent” threshold can help resolve the issue. For those who cannot afford to pay, there are other options available to them including:
Getting approved for an installment agreement with the IRS
Getting approved for an offer in compromise
Request innocent spouse relief
Request a collection due process hearing
Settle the debt with the U.S. Department of Justice
On the other hand, there are some scenarios in which the seriously delinquent status can be removed. These include:
Being impacted by a federally declared disaster area
Requesting an installment agreement
Submitting an offer in compromise
Having an IRS-accepted adjustment that can pay off the full debt
If you manage to fall into one of the above scenarios, it typically takes the IRS 30 days to reverse their action and notify the Department of State. In any case, it is crucial to take proactive steps to resolve the matter. Seek assistance from tax professionals, explore repayment options, and communicate with the relevant government agencies to find a suitable solution. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses penalties and interest, including the most common penalties and how interest rates are calculated.
Failure to File Penalties
Owing the IRS is much more than just owing a tax balance. The IRS also charges penalties and interest, the most common penalties being the Failure to File and Failure to Pay. The Failure to File penalty is charged on tax returns filed after the tax deadline or tax extension deadline without a reasonable cause. It accrues at a rate of 4.5% per month, beginning after taxes are due. For example, if you filed for a tax extension, you have until the usual October 15th deadline to file before penalties and interest begin to accrue. In 2023, the deadline is October 16th. If you did not file an extension, the deadline is April 15th each year before the Failure to File penalty and interest begin to accrue. In 2023, the deadline was April 18th.
Failure to Pay Penalties
The Failure to Pay penalty, on the other hand, accrues at 0.5% per month for every month or partial month that a tax balance remains unpaid. The day the Failure to Pay penalty begins to accrue is dependent on whether you filed a tax extension. If you file a tax extension, the Failure to Pay penalty will begin to accrue after the October tax deadline. If you do not file an extension, it will begin to accrue after the April tax deadline.
IRS Interest Rates
The interest rates on these penalties are calculated based on the federal short-term rate, plus an additional 3%. Interest compounds daily until the balance is paid in full. The interest rates for underpayments in the first quarter of 2024 are as follows:
7% for individual underpayments
9% for large corporate underpayments
Interest rates are determined each quarter. You can find the most up to date news on quarterly interest rates on the IRS website.
Next week, Phil will discuss IRS enforcement. How long does the IRS have to collect back taxes? Can back taxes affect your credit score? Stay tuned for “Ask Phil” next Friday!
If You Are Being Hit with IRS Penalties and Interest, Contact Us Today for a Free Consultation
In today’s world, where healthcare costs are constantly rising, finding smart and effective ways to save money is crucial. One such method that has gained popularity in recent years is the Health Savings Account (HSA). Not only does an HSA allow individuals to set aside funds for medical expenses, but it also offers significant tax advantages. In this article, we will explore the tax benefits of Health Savings Accounts and how they can help individuals save money while maintaining their health and financial wellbeing.
What is a Heath Savings Account (HSA)?
A Health Savings Account (HSA) is a tax-advantaged savings account specifically designed for individuals with high-deductible health plans (HDHPs). HDHPs generally have low monthly premiums but higher deductibles compared to traditional health insurance plans. In 2023, these plans include deductibles of at least $1,500 for individuals and at least $3,000 for families. HSAs help these individuals save money for qualified medical expenses that their health insurance provider does not cover.
HSAs allow you to carry over any unused funds from year to year. Unlike other accounts that often have a “use it or lose it” policy, HSAs offer the flexibility of accumulating funds over time. In 2023, the IRS allows you to contribute up to $3,850 to your HSA if you’re a single person. This amount increases to up to $7,750 for families. Your HSA belongs to you, even if you change jobs.This makes them an attractive choice for individuals who want to save for future medical expenses or even use the funds as a retirement savings tool.
Contributions are 100% Tax-Deductible
Any money you contribute to your HSA is tax-deductible, even if you do not itemize your deductions. So, your contributions can be deducted from your taxable income during tax time, which lowers your tax liability and can potentially push you into a lower tax bracket. In addition, if you make contributions through payroll, this money is deposited pre-tax, which also lowers your total tax liability. In other words, these contributions can be excluded from your total gross income.
Contributions and Distributions are Tax-Free
Just like a brokerage account or an IRA, you can invest through your HSA. Once you fund your account, you can choose your own investments or allow the experts to do it for you. The best part is that these contributions grow tax-free. This means that you pay no taxes on the interest the account earns. On top of that, any distributions you use to pay for qualified medical expenses are also tax-free. If you use your HSA to pay for non-medical expenses, you’ll be subject to income taxes and an additional 20% penalty. If you are 65 years old or older, non-medical expenses will not incur the 20% penalty, but the income taxes will still need to be paid. This is also true if an individual suddenly becomes disabled or if they die.
HSAs Can Be a Last-Ditch Effort to Lower Your Tax Liability During Tax Season
As tax season approaches and we start receiving our income documents, we might want last-minute ways to lower our tax liability. Contributing to an HSA is a great way to do this for several reasons. One reason is again the fact that contributions to an HSA reduces your taxable income, which in turn reduces your tax liability. Secondly, you can continue to contribute to your HSA all the way up until the April tax deadline. This means that you have an additional few months of contributions to reduce your taxable income from the prior year.
Should I open an HSA?
Health Savings Accounts provide individuals with a unique opportunity to save money on a pre-tax basis, enjoy tax-free growth, and use the funds tax-free for qualified medical expenses. That said, they are definitely worth looking into. To qualify, you must be covered by a high-deductible health plan (HDHP) and have no other health insurance, except for worker’s compensation, specific illness-related insurance, or a fixed coverage per day if you are hospitalized. You cannot be enrolled in Medicare, and you cannot be claimed as a dependent by anyone else. By leveraging the benefits of an HSA, individuals can effectively manage their healthcare costs while maximizing their tax savings.
