Author: danitzarave

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Mistakes…They happen, right? Unfortunately, when mistakes are created on a tax return, it can end up being extremely costly to the taxpayer, especially when they’re self-prepared. Using a reputable tax preparer, CPA, EA, or any other knowledgeable professional – helps to eliminate these errors. This article will present ways to avoid these mistakes.

Social security numbers. When there is a missing social security number or a transposition of numbers, this will cause a delay in processing a tax return. Be sure to always double and even triple check all this information is included on the return, and that the numbers are entered correctly.

Misspelled names. When any name is entered on a tax return, a taxpayer must always enter the name exactly as shown on your social security card. This is one of the few reasons why tax professionals always ask for a copy. You never want to put a shortened version of your name. If you are Susan Friendly, you would never enter the name on your return as Sue Friendly. If your name is Robert Barker, you would never enter Bob Barker on your return. Think professional and formal…always.

Filing status. Not electing the correct filing status can affect many things on your tax return. If you choose to file your taxes using automation DIY like TurboTax, I highly suggest you review the nifty Interactive Tax Assistant tool that the IRS provides taxpayers free of charge. You answer a handful of questions, and the tax assistance will tell you what filing status you would need to file, especially if more than one status could apply.

Mathematical errors. Yes, this is one the biggest costly and common mistakes a taxpayer makes on their return. This can trigger IRS audits and a slew of other issues. The range of simple math errors is as small as basic addition and/or subtraction to more complex calculations. I highly recommend that all DIY taxpayers check their math! Or purchase more professional tax software to *help* you with the more complex calculations; this is especially helpful for those with little to no accounting or tax knowledge.

Trying to figure out deductions and credits. Taxpayers can easily (and do) make errors when trying to calculate their Earned Income Tax Credit , dependency credits, and the brand new recovery rebate credits, to name a few. Again, this is a reason why you would want a tax professional to help you. If you cannot afford a tax professional, or you prefer to DIY, then please be sure you are using the Interactive Tax Assistance tool.

Bank account numbers. This is a big one for those taxpayers that owe taxes at the end of the year or receive a refund. If you enter an account number incorrectly, there will be major repercussions. Taxpayers who use direct deposit when they are expecting a refund receive the money faster, and it’s easier to track if there was a taxpayer error in entering the routing and/or account number.

Missing signatures on the return. When a tax return is not signed, then the return is invalid. In most cases, both spouses must sign the tax return if it’s joint. Now with every, there is usually an exception. Here is the exception to this rule. If you or your spouse is a military member and deployed, he/she cannot e-sign. Here is an IRS article entitled Publication 3 (2019) Armed Forces’ Tax Guide. The other exception is a POA (Power of Attorney); you can read about that here. If a taxpayer e-files their return, this will *help* eliminate the missing signature issue because tax software requires an electronic signature to be able to send your e-file.

Expired ITINs (Individual Tax Identification Numbers). You can still file the tax return with this expired number. The IRS will still process the return, and it will be marked on time. The caveat to this is the IRS will not allow any exemptions or credits to a tax returned e-filed with an expired ITIN. That is unfortunate, but at least they still consider it filed on time (if it’s within the deadline, of course), and you will not receive any late filing penalty. The taxpayer will receive a letter from the IRS advising the client to renew their ITIN. Once the taxpayer has done the renewal, the IRS will continue to process the return as normal.

I hope this article has been helpful and made you just a bit more knowledgeable. Should you have any questions regarding this article or need tax help. Please feel free to contact us.

The $800 minimum franchise tax is the minimum franchise fee that a corporation will have to pay to operate in the state of California. There are other states with this fee requirement, but we will focus on California.

Overview of the $800 Minimum Franchise Tax

As I stated above, the $800 minimum franchise tax is the minimum franchise fee that a corporation will have to pay to be able to operate in the state of California. Other states enforce a similar fee, but there are differences in the structure of this particular tax fee. For companies that run and operate in California, the franchise tax will be either a percentage of income or $800, whichever is larger.

In California, there are different tax structures for different types of corporate entities. You have:

• S – Corporations at 1.5%
• C – Corporations at 8.84%
• Professional Corporations at 8.84% unless they choose to be taxed as an S – Corporation status.

So, whether or not a corporation is a native of the state, the tax rates will not differ. Domestic and foreign (not formed in California – so out-of-state businesses) will pay the same tax rate. Whether a corporation is active, inactive, filing for a short period (12 months), or is operating at a loss, it will not affect the tax rate. The same goes for those companies that have a $0 profit, are still required to pay the $800 tax. There is only one way to avoid the $800 minimum franchise fee, and that is by dissolving the company.

The franchise fee will have to be paid in the first quarter of your business’s accounting period, regardless of business status; in most cases, that would be April 15th. You must pay the fee by using FTB 3522 or by paying online at the Franchise Tax Board.

Are there exemptions to paying the $800 fee?

Thanks to the extraordinarily high franchise tax rate, California has garnered a reputation as a state that does not welcome new businesses, even though state tax requirements are based on where business is conducted, not where it’s incorporated, so a “foreign” business would be subjected to the same tax.

This is actually the way other states operate as well, not just California.

• First-year exemptions. California will waive the franchise fee for the first year a corporation exists. Instead, the franchise tax on the corporation’s net income will be applied, which may be less than the $800 fee.
• The 15-day rule. If a business operates within 15-days of the end of the tax year with no business conducted, it will not be subject to the franchise tax. The following year would be considered the first fiscal year, and the fee would begin applying.
• Tax-exempt status. In certain situations, a company may be granted tax-exempt status by the California Franchise Tax Board (FTB) or the California Constitution (yes, every state has one). These would mainly be companies working as not-for-profit organizations, some veteran organizations, or charities.

Regardless of these exemptions, there are many schemes out there to try to avoid paying the tax, but they always fail. Besides the above three exemptions, the last and true way to avoid the fee is to be a sole proprietorship; they are exempt from the tax.

During the early onset of the 2020 pandemic, many people decided to join the gig economy workforce. People did this for many reasons such as to get out of the house for a little while, to help others who could not help themselves, and to just keep their family afloat with rent, clothing, and food, to name a few reasons. Whether this type of work was done as an extra source of income or actual business, all taxpayers must understand how this gig work affects their taxes.

A quick background on what a “gig” economy is or what “gig” economy means will be explained here. A gig economy is also known as an “on-demand” job, access, or a sharing economy. The people involved the gig economy earn money as freelancers, independent workers, or employee. The tech used are online platforms to connect them with customers that need a good or service. Examples of some of these goods and service would be providing delivery services, ride-share services, and perhaps renting out their home or a spare bedroom for a specified amount of time.

Here are some very important points that a taxpayer should know about the gig economy and taxes

1. Money that is earned through this type of work is usually taxable income;
2. Tax implications for both the company (online platform) and the person performing the service(s);
3. Income is usually taxable even if the taxpayer does not receive a 1099-NEC (Non Employee Compensation form), 1099-MISC form, 1099-K form, or a W-2.
4. Activity may be part-time or side work;
5. Taxpayer is paid in cash;

The gig economy worker is generally required to pay income taxes, FICA taxes, Self-Employment taxes, and additional Medicare taxes.

Independent contractors can deduct business expenses. However, before running out to write off everything under the sun, its always a very good idea to check the rules around anything you may want to write off like car and home expenses. Having a solid foundation of this knowledge will only benefit you and save you from any possible IRS audits. Independent contractors must also remember to track their expenses in a logbook, a spreadsheet, etc.

When renting out property special rules usually apply since the taxpayer(s) use it for themselves as well. Taxpayers must remember that all rental income is taxable income.

Gig workers also have to remember that taxes are not withheld from their pay because they are not employees of a company. Here are two ways that they can pay their taxes in advance:

1. Gig workers that may have a W-2 job where there employer withholds taxes from their paycheck can complete and submit a new W-4. The employee would want to do this so additional taxes get withheld from their actual employer paycheck. Having these extra withholdings being deducted can help cover the taxes owed from their gig work.
2. The gig worker can make estimated quarterly payments. They do this to pay their taxes and any self-employment taxes owed throughout the year.

If you would like more information on gig work, please click on this link.

Many people feel that using an online tax software program is as efficient as hiring a tax preparer. Do I agree with that line of thought? The answer would be yes….and no. It all depends upon your tax situation and other factors. Those online tax programs are great when it comes to people that have absolutely no deductions, itemizations, adjustments, or anything they need to claim. The DIY is great for teens and young adults with a W-2 job and no other factors for the tax return. Now, if you are a person doing gig work, independent contracting, or someone with just a lot of itemizations, deductions, kids, etc. then hiring a tax professional is definitely the best way to go. Let me list a few reasons as to why hiring a tax pro is much better than using AI:

1. Your time and/or patience when completing your own taxes.
2. Lack of the newest and complex tax law knowledge. Tax pro’s must continuously take IRS approved courses in order to prepare taxes and eliminate mistakes which could be costly if you complete your taxes as DIY.
3. Unlike an online tax software program, you will have a live person to answer your questions and concerns, and vice versa. DIY tax software can only do so much. We have had to fix many IRS issues for clients that chose the DIY way of tax filing.
4. Tax professionals can find or know about deductions that you may not find on your own. We can also point out what you cannot use to save you from an IRS audit.
5. If you are ever audited by the IRS, unlike an online tax software, you will have an actual professional to assist you with your IRS issue(s).

If you have never had your taxes completed by a tax professional, I would like to invite you to contact us at Rave Financial Services, LLC at 909.247.1740, or by email at danitza@ravefinancialservices.com for more information, consultation, or to have your taxes prepared. We look forward to assisting you!