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San Jose, CA tax attorney for corporate taxes and TCJAA C Corporation is a separate legal entity that protects a business owner’s assets from creditor claims. All corporations are C corporations by default until a business owner files for S corporation status. In a C corporation, business income and expenses are taxed to the corporation. When a business owner or owners receive profits from the business as dividends, the owner(s) must also pay income tax on the profits – creating a double taxation situation. On the other hand, S corporations are “flow-through” entities, meaning business income is treated as owner and investor income for tax purposes. This may make it seem as if operating your business as an S corporation is a better choice than operating it as a C corporation. However, major changes to U.S tax law were established by the 2017 Tax Cuts and Jobs Act (TCJA) that may influence your decision regarding corporation status.

The Qualified Business Income Deduction

The TCJA initiated sweeping changes to tax law, including the new qualified business income deduction, which is also called the Section 199A deduction. This deduction allows certain individuals the opportunity to deduct up to 20 percent of their qualified business income. However, business income generated by a C corporation is not eligible for this deduction. The TCJA also enacted a flat 21 percent tax rate on C corporations, which is much lower than the previous rate of 35 percent. Because income from an S corporation is taxed at the personal level instead of the corporate level, S corporation income does not qualify for the 21 percent tax rate. S corporation income flows through to the shareholders’ personal tax returns and can therefore be taxed at rates as high as 37 percent.

Potential Issues Regarding Switching From S Corporation to C Corporation Status

The Tax Cuts and Jobs Act included provisions to help make the transition from S corporation to C corporation easier. Section 1371(f) extends the time period during which an eligible terminated S corporation can make tax-free distributions from its accumulated adjustments account. Business owners should keep in mind that there is a time constraint regarding the transition relief offered by the TCJA. An eligible terminated S corporation must revoke its S election no more than two years after the TCJA is enacted. This means that reversals after December 22, 2019, will not qualify.

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San Jose tax lawyer for amended tax returns

In previous blogs, we have discussed the many consequences of not paying your taxes in full. However, sometimes a person has the opposite problem: the overpayment of taxes. If you have inadvertently or mistakenly paid more than your fair share of taxes, you may wonder if there is a way to get that extra money back. Whether or not the IRS will refund your money is based on many factors. Read on to learn about your options if you have overpaid your taxes and how a qualified tax lawyer can help.

Getting a Refund From the IRS

If you have overpaid the Internal Revenue Service (IRS), you may be able to receive a refund. If the IRS is aware that you overpaid, the agency may correct the issue by refunding you the extra balance. For example, if your tax return shows that you owe $2,000, and you send the IRS a check for $3,000, the IRS may refund you the extra $1,000 without issue. However, the situation becomes more complicated when the IRS is not aware of the overpayment. 

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San Jose, CA tax lawyer for innocent spouse relief

Married couples have the option to file a joint tax return instead of separate tax returns. There are often benefits to choosing this filing status, but there can also be drawbacks. Couples who file jointly are “jointly and severally” responsible for any tax liability, interest, or penalties due. The terms “jointly and severally” mean that each spouse is legally responsible for the entire tax debt. When one spouse does not adequately fulfill his or her tax obligations, this can leave the other spouse in serious trouble with the Internal Revenue Service (IRS). Fortunately, there are several ways that a spouse in this situation can be released from tax liability. One of these types of tax relief is called “innocent spouse relief.”

What Is Innocent Spouse Relief?

Imagine this scenario: your wife is a business owner who struggles to keep track of her profits and expenses. When you jointly file your tax returns, the IRS notices that there are inconsistencies with the business income, expenses, and/or deductions. You are audited. As a result, both of you now owe a significant amount of money in back taxes. In situations like this, innocent spouse relief, also called innocent spouse protection, may help a guiltless spouse avoid his or her spouse’s tax liability.

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Santa Clara County QBI tax deduction lawyer

The qualified business income (QBI) deduction was created by Section 199A of the Tax Cuts and Jobs Act of 2017 and since then, the IRS has issued additional rules and guidelines on how taxpayers can take this deduction. Because it could significantly reduce a person’s tax burden, qualifying taxpayers should understand how this deduction operates and the limitations of the deduction.

Details of the QBI Deduction

A Section 199A QBI deduction can be taken by owners of pass-through entities engaged in qualified businesses. Such taxpayers can claim up to a 20 percent deduction on all qualified business income.

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San Jose, CA quarterly tax payment attorneyIf you have to pay estimated quarterly taxes, it is critical to pay the correct amount. Underpaying can result in a penalty, and overpaying gives what is essentially an interest-free loan to the government that cannot be recouped until a return is filed.

This is especially true in light of the Tax Cuts and Jobs Act of 2017, which substantially changed income taxes. The law altered the tax brackets and tax rates for individual or married taxpayers, made changes to the allowable deductions for business expenses, increased the standard deduction and child tax credit, took away personal exemptions, and limited or ended other deductions. Because of this, many taxpayers will need to adjust the amount of the taxes they remit each quarter via estimated tax payments. 

Who Must Pay Estimated Quarterly Taxes?

Typically, taxpayers have to make estimated tax payments if they expect to owe tax of $1,000 or more when their returns are filed. One common category of taxpayers who should pay estimated quarterly taxes are people who are self-employed. In addition, investors and retirees often need to make these payments because they have a substantial portion of income that is not subject to withholding. Other income that is typically not subject to tax withholding includes interest, capital gains, stock dividends, alimony or spousal support, and income from rental property.

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