Taxable v. Nontaxable Income

Tax season will be here soon, which means your friendly numbers nerds are getting ready! From balance sheets to calculators and everything in between, this is a busy time of year with a lot of moving parts. Tax day, Tuesday, April 17th, will be here in just 162 days. It’s a good idea to think ahead.

When it comes to income, it’s a fairly safe bet to assume it will be taxed. For example, salaries, bonuses, interest and business income are almost always taxable. However, there are some exceptions when it comes to what is and isn’t taxable. This stuff is important to know – different types of income can greatly impact your tax strategies for the upcoming year.

Everyone earns income in some shape or form, and knowing when you should and shouldn’t be paying tax is a must. As a business owner, it’s also important to realize what your employees may need to report on their tax filings, and how this might impact your business’ tax strategy.

To help you with your tax planning, we’re here to help break down which forms of income may be taxable.

The following types of income are taxable, and need to be reported properly:

  • Benefits from unemployment
  • Punitive damages
  • Income from bartering, which is based on the fair market value of the product or service you receive
  • Disability insurance income – if your employer paid the premiums
  • Fringe benefits you receive for performance of your services – think wellness benefits, company car use, etc.
  • Rent payments you receive for personal property – if you are operating your rental activity as a business
  • Gambling winnings and cash prizes

However, not everything is taxable. Here are some of the nontaxable types of income:

  • Workers’ compensation benefits – unless they are part of your retirement package
  • Disability insurance income – if you paid the premiums
  • Compensatory damages for getting sick or being injured
  • Cash rebates from the dealer or manufacturer of a service or product
  • Excluded fringe benefits, such as health insurance, parking and employee discounts
  • Child support payments
  • Rent money if you rent out your primary or vacation home fewer than 15 days a year. This is important to note if you use popular vacation rental sites, such as Airbnb and HomeAway. Also, note that if you rent it out more than 14 days, the activity is taxable.
  • Gifts and inheritances – if your great-great uncle passes away and leaves you his massive stamp collection, lucky you – no income tax!

It’s important to keep in mind these lists don’t include every taxable and nontaxable type of income under the sun, and there are often rules and exceptions that may apply. If you get confused, or aren’t sure if you should really be reporting something, check in with us. We’re here to help.

A version of this post first appeared in Eide Bailly’s Year End Tax Planning Guide.

Tracking Taxes

We all know we need to track our business transactions. However, there might be some tax considerations you weren’t thinking of…

Apportionment.

What? Apportionment is a fancy tax term describing the method you use to allocate your income (or loss) to a specific tax jurisdiction. Determining which states your income should be apportioned to goes back to the concept of nexus. O, man another fancy tax term…

We’ve already talked about the concept of nexus as it relates to sales and use tax on our blog. If you remember, nexus (a.k.a sufficient physical presence) creates the responsibility to pay tax in a state you are doing business. If you want to know more, click here.

Once you determine you have nexus in a state (and we are talking for income tax purposes), there are some considerations when it comes to tracking your assets, income and expenses. Here are a few of the common areas that need to be tracked by state:

  • Fixed Assets
  • Inventory
  • Payroll
  • Rent
  • Revenue

If any of those terms don’t sound familiar, our glossary might help.

Tracking these areas from the beginning is much more fun (only because we think accounting is fun) than going back through a year’s worth of financial data to figure it out.

Personal Mileage

Bottom-line, Uncle Sam only wants you taking a deduction for business miles (makes sense right?). Here are two points we think are important for you to consider:

  1. Track your mileage (personal, business + commuting (from home to the office and back)
  2. Personal mileage could be considered a taxable benefit (and should be reported as taxable wages)

Meals, Travel + Entertainment

Here’s the deal on meals, travel and entertainment…these are some of the most scrutinized expenses when it comes to Uncle Sam (that’s because the line is often blurred between personal and business in this area). When it comes to tracking these types of expenses, make sure you are keeping the supporting documentation (ex. receipt or invoice) to substantiate the business purpose of the expense.

Business Documents

We’re talking about your articles of incorporation, bylaws, member and operating agreements, etc. These documents are not only important when starting your business but also important throughout your business lifecycle; keep them where you can find them. In addition, keep copies of any correspondence with Uncle Sam (a.k.a IRS). And if you want to be really nice to your tax professional, share these documents and correspondence with them (keeping them in the loop can save you).

These are just some of the considerations from a tax perspective. Make sure you are staying connected to your business partners (i.e. your tax professional) throughout the year. Need one? We have plenty; let us know how we can help.

 

 

The Tax Implications of Crowdfunding

As you begin your endeavor, there are several ways to pursue funding (like these). One of the ways to gain funding for your endeavor is crowdfunding.

Crowdfunding is “a method of raising capital through the collective effort of friends, family, customers and individual investors” (source).

Crowdfunding generally uses the method of online platforms (social media for instance), to engage a large group of individuals and increase exposure.

In the search for increased reach and exposure, crowdfunding has even attracted our friends at the IRS. Recently, they explained the tax treatment of crowdfunding, especially as it relates to income inclusion.

What?

Code Sec. 61(a) defines gross income as all income from whatever source derived. Obviously, there are some exceptions (shocking no?), but for the most part, all the income you earn is part of taxable income, regardless of where it’s derived, unless it is specifically excluded.

So why does the IRS care?

Based on the above reference, they have concluded that crowdfunding payments are taxable income unless one of these exceptions are met:

  • Loans with a repayment obligation
  • Capital contributed to your organization in exchange for some portion of your company (equity interest)
  • Gifts

Crowdsourcing is a fairly new concept in the tax world so there is no case law at this time. It will be exciting to see how the tax courts react to this down the road.  (Yes, I’m a tax nerd and think this stuff is exciting.)

When do I have to pay tax on crowdsourcing receipts?

If the crowdfunding payments do not meet one of the exceptions listed above, they are probably taxable in the year the payments hit your account.

Which brings us to another term you’re excited to learn: constructive receipt. This basically means that income is taxable in the year funds have been credited toward your account and made available for you to draw on in the future, even if they have not physically received those funds.

The moral of the story?

There are tax ramifications for just about everything you do in business. So it’s important to be mindful of your finances, and what you’re reporting.

Still confused or need more help? We’re here.