By Eric Little, CPA – 

If you’re trying to make money by buying, improving, and reselling homes—known colloquially as house flipping—it pays to pay attention to taxes. A lot of things go into whether you can make a profit flipping, and not all of them are predictable, but taxation often is. If you know how real estate business taxes work, you can make plans that minimize your tax burden and maximize your profit.

Your Properties Are Considered ‘Inventory’ For Tax Purposes

The IRS considers most flippers real estate dealers, because, as Nolo explains, buying and improving homes for sale is their usual business. As small businesses, real estate dealers must worry about business taxation on their inventory—the real estate they plan to sell. The IRS considers homes inventory for this kind of business, just like a seller of orange juice or t-shirts would count those items as inventory when doing their taxes.

This rule used to cause problems for real estate dealers, who, under IRS rules, couldn’t deduct their high-cost home purchases as an expense until they were sold. If they made a big purchase right before tax time, too bad; no deduction until the sale. That situation can make budgets very tight for a smaller business.

New Rules for High-Cost Inventory Change The Game For Small Businesses

However, in late 2017, the Tax Cuts and Jobs Act changed the rules on that, raising the threshold for using the accrual method from $1 million (for an inventory-based business) to an average of $25 million over the prior few years.

That new rule instantly changes things for small house flippers, who are unlikely to go over $25 million in gross receipts. Now, flippers who are below the threshold can deduct inventory using (in relevant part) “the taxpayer’s method of accounting.”

Small business accounting firm Catching Clouds says this seems to mean treating your inventory/properties consistently with the rest of your accounting. Thus, at least in theory, you can use any method of accounting you want, including one that allows you to deduct the price of the real estate after you pay it, as long as you follow it consistently.

Many CPAs would advise caution here. The IRS reserves the right to challenge any taxpayer’s accounting methods, and if you get it wrong, you may be charged back taxes and penalties. Before taking full advantage of this opportunity, you may wish to talk to an experienced small business CPA with experience in real estate investing.

Talk to our Charlotte CPAs today

New tax laws like the increased threshold for accrual-based accounting means that your financial strategy may need to shift significantly. If you are a real estate investor or have passive real-estate investments, this new change could potentially impact your business.

Our tax & financial planning professionals at LBJ CPAs have the experience, knowledge and creativity needed to stay ahead of all tax code changes and to help keep the regulatory burden off our client’s shoulders. Call our office today and schedule your free consultation with LBJ CPAs today to learn more about how your real estate portfolio could be affected by the new IRS inventory reporting methods.

By Eric Little, CPA – 

Money is a common stumbling block for startup businesses. Business leaders need it to hire employees, rent an office and eventually sell their products. But startups, almost by definition, don’t have a lot of extra cash around. That slows their growth—and therefore, their profitability.

Attracting “angel investors” can be tough, which is why startups trying to raise capital should consider offering a little-known but attractive benefit: Qualified small business stock. Under the right circumstances, investors in a small business can cash out their QSBS completely tax-free, even if they had big capital gains. This makes QSBS a fantastic reward for ground-floor investors who stick with a company throughout its climb to success.

How Qualified Small Business Stock Works

Qualified small business stock is stock class issued by a C corporation (not an S corporation or any other business form) from the United States.

As the Internal Revenue Code says, the stock must be original-issue, not resold, which is why this is a great mechanism for early-stage investors. The corporation must not have more than $50 million in assets at the time the stock is issued—also not likely to be a problem for many startups.

During most or all of the time the investor holds the stock, the business must remain a C corporation, and at least 80% of the corporation’s assets must be used in the active conduct of a qualified business*, as defined by the IRS:

Deciding what’s a qualified business can get complicated, and we welcome inquiries from business leaders about it, but a technology startup is likely to be a qualifying business. Once all these classifications are met, the real advantage of the QSBS goes to the medium-term holder of the stock.

If the investor holds the stock for at least five years and it goes up in value, the tax code exempts that increase from the capital gains tax!

This is assuming that the investment was made after September 28, 2010, which is likely for current startups.

States may still charge capital gains taxes, so QSBS doesn’t make a windfall from a stock sale completely tax-free. But it does reduce the seller’s tax burden very substantially—and that’s a great enticement for people with money to invest. For startups, incorporating as a C-corporation can be a great way to finance the rapid growth they need to get to market and—eventually—realize a great profit on their ideas.

Talk to our Charlotte CPAs today

Rule updates like the QSBS mean that your financial strategy may shift significantly, to keep up with the best opportunity for your money. Our tax and financial planning professionals at LBJ CPAs have the experience and creativity needed to stay ahead of all tax code changes and to help keep the regulatory burden off our client’s shoulders. Call our office today and schedule your free consultation with LBJ CPAs today to learn more about QSBS and other forms of early startup financing.

We had a business client who would do his bookkeeping internally with little oversight.  He had hired a new office manager to do the books and did not review this person’s work.  The office manager incorrectly reported $90,000 of bank transfers as income and after we found the error, we amend the client’s tax returns for a $35,000 refund.

We picked up a new business client who was in the manufacturing industry.  Manufacturers qualified for the Domestic Producer’s Deduction (pre 2018).  His previous CPA did not elect to take this deduction.  We amended 3 years of tax returns to get the client $60,000 of refunds.

We obtained a new client whose tax return was fairly complicated compared to prior years.  The accountant who prepared the returns made several material mistakes that resulted in the taxpayer owing the IRS and NCDOR $32,311.  After reviewing the returns, we noticed significant errors and decided to amend them.  Our changes not only eliminated his balances due, but gave him a refund of $10,872, thus saving the client $43,183 in taxes.

We obtained a new client who was a 25% owner of a company and the managing partner was forcing him out.  The original partnership agreement stated how the company’s value would be determined if one of the owners were to leave and that the company’s CPA would perform the calculation.  The other CPA calculated our client’s share of the company to be worth $95,000.  Our client thought it was rather low and engaged our services to double check the work.  After asking various questions to the managing partner and the CPA who performed the calculation, we reworked the numbers and determined that my client’s share of the business was worth about $200,000, a $105,000 increase from the other CPA’s calculation.

A client came to us with a $200,000 IRS Tax Lien.  His current accountant, who had been doing his taxes for years had decided to file an Offer-in-Compromise and they did it incorrectly and so the Offer was returned to the client as being Incomplete.  We met with this client for the first time and reviewed his past tax returns as well as the correspondence he had received from the IRS.  After obtaining authorization from the client to speak with the IRS on his behalf, we called the IRS to discuss the Tax Lien.  It only took us 15 minutes on the phone with the IRS to realize that the Tax Lien for $200,000 had a typo and that it should have been only $20,000.  The client did owe the $20,000, but the fact that the other Tax Accountant did not take the time to properly assess the situation and perform the necessary Due Diligence to plan a proper course of action. This cost the client a lot of anxiety and money which we were able to save.

We had a new client come to us with a $53 Million Dollar IRS Tax Lien.  We thought it had to be a typo.  Sure enough, that was the correct amount the IRS was assessing our client over 5 years of not filing his tax returns.  We consulted with the client about his situation and proposed different scenarios to either reduce or eliminate this tax assessment.  Through proper planning, we were able to take this $53 Million Dollar Tax Liability down to about $17,000 through effective tax strategies.

We had a client who came to us with an IRS Tax Lien for $1.5 Million Dollars.  He hadn’t filed his taxes in several years.  We were able to file all of his back taxes and reduce his federal tax liability to $25,000.  Since he was going back to school to get his Master Degree, we were able to put him on Uncollectible Status with the IRS so they would not empty his bank accounts or put him on a payment plan.  We also decided to file an Offer-in-Compromise with the IRS to try and reduce that $25,000 tax liability to $1,800.  We told the client that the likelihood of getting the Offer accepted by the IRS was slim, but the costs of filing the Offer were worth the rewards and so the client decided to pursue the Offer-in-Compromise.  The client did actually receive acceptance from the IRS and was able to pay off his $1.5 Million dollar liability for only $1,800.

We had a client who was a non-US taxpayer living in Hong Kong who hadn’t paid US taxes related to stock option income from a US assignment dating back several years.  He came to us as a referral from another client.  The IRS had put a lien on his US bank account and seized $105,000 from his account for back taxes and penalties due.

We immediately filed the appropriate returns and contacted the IRS agent in charge of the case.  Initially, we were able to get $35,500 back from the IRS, but were still out of pocket almost $30,000 in penalties and interest.

We drafted a letter to the IRS to send along with a request to abate Penalties arguing that the taxpayer did not realize he had an obligation to pay taxes and that his frequent moving did not allow for constructive receipt of the IRS’s letters.

The IRS accepted our appeal and granted the taxpayer a refund of $26,500 of assessed penalties and interest.