IRS Tax Accountant Q & A
From Cash Tracks Financial, Inc.
Owner Marcelino Dodge, EA
Tax Advisor Podcast From 10/07/2021 Continuation . . . Part 5
This tax advisor information is Part 5 from the podcast transcript originally recorded Tax Answers Advisoron VoiceAmerica on October 7, 2021. This program is presented by Marcelino Dodge, Enrolled Agent, owner of Cash Tracks Financial, Inc. Cash Tracks Financial is an accounting, tax services, financial advisory, business planning, and retirement planning, insurance advisory company located in Lamar, Colorado and serving all communities in Southeast Colorado. You can find out more on this IRS Tax Accountant Q & A web page.
What Is Taxable Income Or Non-taxable Income?
Tiff:
Next question, what is considered taxable income versus non-taxable income?
Marcelino:
Oh, well, first thing I will say is cash payments, I will stress this cash payments received as a sole proprietor is still considered taxable income. Okay, they talk about paying under the table, well, whether it’s under the table above the table around the table, the IRS don’t care, its income. Sure. Cash, cash payments are as much as income as anything else when you’re getting receiving money for services rendered even as a self-employed person. So that’s vital now, okay, back to taxable. Now, of course, there’s many phases to this, which include wages, of course wages you receive as an employee, if you’re receiving interest on your bank accounts.
Capital gains from sale of property could be sale of property could be sale of stock could be all kinds of different things there. Now, one that also is there is an entity flow through income. So if you’re, you have a partnership or like an S corporation, that issues you a K1 out for your business, well, you should do a k one as, an part owner of the business while that income is also considered taxable to you. Now, the interesting part on that is you may, you may have say you have $5,000 of flow through income from an S corporation, you may not even have even gotten that $5,000 Or even touched that $5,000 or been distributed that $5,000. But it’s still taxable income to you because you’re part owner in the business.
Tiff:
Okay.
What Are Other Types Of Income?
Marcelino:
And there’s a lot of other facts that come in a lot of other types of taxable income, we’re talking like most many retirement plan distributions. IRA distributions you get. Now, some of these courts we’re talking have to be also over and above the, your filing status, like married, there’s the standard deduction, they also have to exceed that as well. But many in many cases, these do so it’s just some, basically and there’s a broad, broad definition for tax for even one thing that most people don’t realize that even scholarships amounts can be considered taxable income. And there’s a little trick you can do with those to help parents and students to get some, some tax benefits even though it’s considered taxable, but there’s some tricks in there I learned this last year that are really, really good with that.
Is Social Security Income Taxable
So in some circumstances, now, as far as non-taxable, usually Social Security is non-taxable. However, there are times when Social Security can become taxable depending on income pay individuals. Yeah, so it’s and I encounter. This was several people, your here’s a, here’s a fact regarding Social Security tax ability is that Social Security became taxable back in 1986. And the amounts they use to determine that whether it’s taxable or not have not changed since 1986 . . .
Tiff:
Really
Marcelino:
. . . is the same amount. So the percentage of people who pay tax on their Social Security has greatly increased between 1986 and 2021. It’s, it’s a fascinating fact, also considered like dividends from a municipal bonds, those, are usually non-taxable. And even that includes like a mutual fund as well. Now they’re used for other calculations, but you usually don’t pay tax on it. For the most part. If a person does foster care in their home, that’s an example. That’s, that’s like a reimbursement from the county to take care of the child, you don’t pay tax on that. And then like, if you get a reimbursement from your employer for, for some business related expense you have and your employer reimburses you for that. That’s usually considered non-taxable income as well. There’s a few other areas, but those are kind of some of the main ones to kind of, kind of get a little bit of that answered there. And the most common ones that that we encounter anyway.
Tiff:
Okay, that that makes sense. So the, like, the non-taxable reimbursement and stuff would be like, if you had purchased fuel for a vehicle on a business trip or something like that, the employer reimburses you is that non-taxable?
Marcelino:
That could be now Yeah, yeah, that’s an example of that would also benefit there’d have to be like an accountable plan in the business to do such setup to do that. So in certain cases, so but, yeah, basically something, something of that nature can be Yeah.
Should I Separate Income Types?
Tiff:
Okay. Now, when we do and things that I’m learning even more now, we separate out all of our expenses in our businesses into a lot of different categories. Does income get separated? Other than taxable non-taxable? Is there any other differences in how we separate areas income basically just income?
Marcelino:
For just record keeping purposes, I suggest having like the sources of income separated, okay, times on a tax return, I’ll go in and, you know, put because there’s just one line for income, like gross income on the tax write? Well, you go in for record keeping purposes, it’s not, it’s good to know, okay, well, we made like, for this type of service, we made this much for this type of service we made this much, which is usually that’s more like a profit and loss kind of statement is where most of those are because usually, we’ll just take that number right there and just plug that in on the tax return. That’s more that’s more in the bookkeeping area, then for the tax or as far as the source of the income there. Unless, unless you’re dealing with, like inventory. And that kind of adds another little quirk into it. But we don’t need to get into that.
What Is Depreciation And How Does It Work?
Tiff:
So this, this one has always kind of boggled me a little bit, and I and I have a little bit of an understanding of it, but when and on what is depreciation applicable? And Are there reasons to depreciate things as opposed not to on your taxes? Can you or not?
Marcelino:
Well, depreciation is we do a whole show just about depreciation, frankly. But that’s kind of the short and trying to get some stuff here. Depreciation is usually on equipment and property that has a useful life of over one year. And those rules have actually, I would say, lightened up over the last few years. Because now certain, certain items that you had to depreciate that were under $2,500, you had to depreciate, but now, there are the rules, there are rules that allow you to actually deduct these items that are under $2,500 or less, which is if they have a use long, useful life, but they’re under $2,500. Usually, you can just deduct them, without having to depreciate them, you, the business can choose to depreciate these items, but and they can actually make an election to say, Okay, we don’t want to do 20, we don’t want to expense everything under $2500, we want to expense everything only $1000 or less, and then you can depreciate above that there’s some electrodes that kick in there.
But when you’re getting into larger items that are over $2500, then usually, you do depreciate them over time. And that’s where on a case by case basis is ideal with a taxpayer, because you got to do what’s best for the taxpayer, not just in the present year, but you got to do it thinking ahead to future years, as well. And so there’s a little quirk in the law for property that’s for several years of property. Right now are at least up to 15 year property that you can take bonus depreciation on, which would be 100% deduction or your course, you can take section 179 as well, if you elect out of bonus Now, unfortunately, what many tax professionals do is that a certain item will come in like a vehicle or some type of foreign machinery? They’ll just come in and just take that bonus depreciation, or they’ll just section 179 off that depreciation that item immediately.
Now, you can yes, but is it the best thing for the taxpayer? Not necessarily. Because if a, if a taxpayer has, like $100,000 in profit, and they got that $50,000 piece of equipment, well, maybe, maybe take it off, take that $50,000 deduction on the bonus depreciation or the section 179, which actually, I’m more of a fan of section 179 than a bonus depreciation, but that’s just my personal preference as a tax professional. So in that case, I may take that, but if the taxpayer has only, like $25,000 of profit, and they got this $50,000 piece of equipment, if you take the bonus, you’re gonna have a $25,000 loss. And you’ll get no further benefit of that equipment. So what you got to keep in mind is that, and if you take a net operating loss forward, it doesn’t go against self-employment tax as well. That’s the other part that has to be considered. So what could be done is that you can either take that piece of equipment if you got to $25,000 or you can take like $20,000, a section 179. And then just depreciate the rest over time, so that you get some that year, and you get some in future years.
Tiff:
Okay, so
Marcelino:
Yes, I separate it out, because it really depends on the needs of the taxpayer, and what’s going to be good for them. That’s what it comes down to depreciation wise, which is I’m just not one size fits all and appreciation. So anyway, but you know, Tiff has been fabulous. You’ve had a great conversation here. Your questions, were just wonderful. And guess what? We’re running out of time. It just flew by, didn’t it?
Tiff:
It did. It did.
Marcelino
So you have any questions? I’m just gonna just talk to everybody have any questions about anything that came up today or even further questions, you’re always welcome to give us a call. It’s 844-394-4287. Success@cashtracksfinancial.com is our email address. And just so you know, now you could be talking to me or you could be talking to Tiff and eventually we will be so willing to help you and help you to schedule a free mutual exploration session just to come in and see, hey, is the services here Cash Tracks Financial for you, we want to help you and all taxpayers don’t matter if you’re, what part of the country you’re in.
How We Help You
That’s a great part of being an enrolled agent. We can help you get through it. We have excellent security, a secure portal to be able to send your information back and forth, cloud based software to help you on accounting and taxes. And so definitely here to help you out so we just want again, thank you so much for listening today. It’s been a beautiful session again Tiff. I thank you and appreciate you joining the team here at cash tracks financial so we’re gonna look forward to big things over the next few years as we endeavor to help people save money on their taxes. So have a good day all and thank you. We will talk to you again next week. Again 9am Pacific as always, as I thank you for listening to The Tax Answers Advisor with Marcelino Dodge on the VoiceAmerica Business Channel.
Tax Advisor Services
When you need professional expert IRS tax services, call Cash Tracks Financial Services, Inc. at our office phone number (719) 336-8739 or via our website Contact Us form at Contact Cash Tracks Financial
Our Tax Advisor And Tax Accountant Services Office
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117 W Beech St
Lamar, CO 81052
(719) 336-8739
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