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Ten most used tax deductions for small business owners
There are three main types of audits done by the Internal Revenue Service. Although there's no proven way to avoid an IRS audit, there are steps you can take to minimize your odds. The best way is to carefully review your risk and to take special precautions with items that might trigger the attention of the IRS. Here are some preventive measures.
AMT and ISO Stock Basically, the Alternative Minimum Tax (AMT) is designed to guarantee you pay some minimum tax when you have tax saving preference, i.e. gain on exercise Incentive Stock Option. For those tax preference, you normally don't pay any income tax. But in the AMT, they are being added back to your regular income and then calculate AMT tax at 26%-28%. If the ending result and AMT tax is computed higher than your regular income tax, then you have to pay the AMT tax. Of course, if you sell the same portion of the stock in the same year, then you won't have AMT tax scenario, you just pay straight it as salary income if they are ISO in the nature. However, if you sell it in the future, say over a year after you exercised it, also assuming you hold it over the ISO required period, you will be able to recognize it as long term capital gain which taxed at 20% current. Secondly, if you sell it within a year after the exercise day, you will have to recognize the compensation income of the gain from the exercise price to the selling price. But you would say, what about the AMT tax you already pay for the prior exercise. That will be treated as AMT credit to lower your current year's regular income tax to that year's AMT tax amount, assuming you don't have any new AMT tax preference this year. If you do have new AMT tax preference, the calculated AMT tax might be higher than the regular, then you have to defer the AMT tax credit to the future years. So the tax planning is important for those who would pay AMT and need to know when they should to exercise more or sell more in the coming year. Please consult with us about your AMT situation, if you don't have transaction like exercising ISO, and suspect you owe AMT tax Capital Gain or Loss You can turn unrealized capital loss (paper loss) from current stock market's drop to offset your early capital gain. All you need to do is to sell you losing stock by the end of next year. You can then write off any amount of capital loss against an equal amount of capital gain. Once you run out of gains to be offset, you can apply as much as $3,000 in unused losses annually against ordinary income. Any additional capital losses can be carried forward to later years indefinitely. But, just be ware of 30 days wash sales rule placed before and after on the date you make short-term capital loss -- that is: don't buy the same stock back within 30 days, otherwise, you won't be able to offset the gain. But you always can buy the similar sector's stock at any time. Wash Sales Case 1: How to Calculate wash sales' basis - Stock repurchased with 30 days. Example: 1) If I bought a stock 10 shares for $10/share and sold it for $8/share. 2) Within 30 days, I bought same stock 20 shares for $15/share and then sold for $12/share still within 30 days. 3) Again within 30 days from the first sale, I bought same stock 20 shares for $11/share, several months later(in next tax year), I sold the stock for $7/share. How should I calculate the loss? Again, thank you very much even if you may not have time to respond. Aanlysis: See if I can do this calculation to make you clear, First, remember the formula for the stock basis in wash sale = 1st purchase price + 2nd purchase price - 1st sell price+.....+ nth purchase price - (n-1)th sell price. Therefore, your first wash sale involving 10 share, the basis need to be carried forward to next time sell, and the basis= 10+15-8=17 per share. Another 10 share you can report loss =15-12=3 per share if you don't buy some amount share in 30 days. Unfortunate, you did buy. So the first 10 share in the 2nd cycle of wash sale. Its basis=17+11-12=16, this time, you made final sale, the loss on the 10 share is 7-16=-9 per share. The 2nd 10 share, you also made final sale, its basis before sale=15+11-12=14. The loss you can report on sch. D =7-14=-7 per share. Hopefully, I made you clear. Deduction Often Missed
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