Can I Report All Capital Gains Directly on Schedule D?

So you’ve sold some stocks, bonds, mutual funds, or other investments, and tax time has arrived. Any time you sell an asset that is determined to be a capital asset, you have to determine your holding period and gain or loss and report it on Schedule D.

There are a few caveats with Schedule D, though, and its accompanying forms. 

So Can I Report My Gains or Losses Directly on Schedule D?

Schedule D has a partner form, called Form 8949. Schedule D is the summary of the transactions that are required to be broken out on Form 8949. 

If the only assets sold are normal investments of stocks, bonds, or mutual funds, and they are covered with no adjustments needed, you may report them directly on the Schedule D of Form 1040.

These are broken out on Schedule D as the sum or the short-term investments and then the long-term investments.

So When Would I Have to Use Form 8949?

If your investments are noncovered, you would have to break out each sale on Form 8949 and then carry the results to Schedule D.

The terms noncovered and covered securities simply refers to whether the basis of your investment was required to be reported to the IRS.

If you had purchased your investment prior to 2012 then your investment is likely considered noncovered and the basis likewise not reported to the IRS.

Because the basis is not reported to the IRS, it is your responsibility to break out the transactions on Form 8949 for the IRS’ scrutiny.

If you’ve sold many, many investments and would not like to use Form 8949, you may mail in Form 8453 separately and attach with it a print-out of all investments sold and their details from your brokerage company.

If you would like to skip mailing, some tax software supports the ability to include your investment details as a PDF to include with your e-filed tax return.

Is Having Noncovered Securities the Only Reason I Would Have to Use 8949?

While there are many reasons you would have to use Form 8949 in addition to Schedule D, two are most common: Having noncovered securities, like we’ve discussed, or having an adjustment to your investments that needs to be reported.

If you have an adjustment that needs to be made, such as a wash sale disallowed, you would need to file Form 8949 with Schedule D to show this detail.

Generally, Form 8949 is needed whenever more detail is needed than just what is shown on Schedule D.

 

For questions regarding this topic, please leave a comment below and we would be happy to help.

This article should not constitute legal or tax advice. For help regarding your situation, please consult a local advisor.

Can I Deduct R&D Expenses for a Patent?

Everyone who begins a business is starting something new, but when you’re in the business of creating something to be patented, you go a step further: you’re inventing something new.

It can take time to develop a new product or process, and in the meantime you’re likely to incur expenses in creating it. 

There’s expenses that are directly related to creating the patent, and other ancillary expenses like driving your car for business purposes, or meeting with potential partners or investors.

All of these expenses add up, and you’re likely to ask: If it takes so long to create an income from this patent, what kind of current benefits can I receive?

Luckily for you, there are some options our kind government has allowed you to take advantage of. 

Generally when you create something new, you have to capitalize the expenses and then deduct them annually through the process of either depreciation or amortization. 

This is in contrast to expensing an ordinary payment for an item in full in the year it is paid for. 

And while most of these expenses that are directly related to the patent, like legal fees, must be capitalized into the cost of the patent, and then amortized ratably over a 15 year period starting from the time the patent is allowable, you may take advantage of a provision for Research and Development costs.

That’s right, for Research and Development expenses for the patent, you may elect to deduct them in the year incurred, or capitalize them into the cost of the patent and then amortize them like the legal fees.

To make this election you simply deduct the Research and Development costs on the business portion (Schedule C if you are a disregarded entity) of your tax return in the first year you incur any; no special statement is required to be attached to your return.

Once the election is made, you must continue deducting Research and Development costs every year. You may not switch back and forth between deducting and capitalizing the expenses.

While it seems to be more beneficial to deduct the expenses immediately, one reason you may want to consider capitalizing the expenses is if you do not need the current write-off.

If your current income is low, and you expect your income to grow significantly and place you in a higher tax bracket when the patent is in service, you may want to consider capitalizing the expenses and taking the write-offs in future years.

 

To have your question featured in a future article, please leave a comment below. 

This article should not constitute legal or tax advice. For help regarding your specific situation, please consult a local advisor.

Where is Form 2106 In My Tax Software?

You’ve done your own taxes for years, and thanks to advances like TurboTax, you’ve done them flawlessly. So this year, you go to itemize your deductions, but you’re having trouble finding the form to list your employee business expenses.

Where Did Form 2106 Go and Why Can’t I Itemize My Employee Business Expenses?

That’s right, you’re not going crazy: Form 2106 has been removed from your software after tax year 2017.

President Trump’s sweeping tax law changes effective tax years 2018-2025 removed all itemized deductions that were subject to the 2% of AGI limitation. And unfortunately for all those that paid expenses at work out of pocket and were not reimbursed for them, these changes include those expenses.

Surely There Is Some Way I Can Deduct These Expenses! I Was Never Reimbursed For Paying Them!

Until 2026, there is no way for an employee to deduct these expenses on their tax return.

Self-employed individuals (those individuals issued 1099’s, not W-2’s) can still take these kinds of expenses on their individual tax returns on Schedule C.

The silver lining here is you may discuss setting up an accountable plan with your employer.

This allows your employer to reimburse you for all expenses you’ve paid out of pocket (including mileage), take a tax deduction for it, and do so all employment tax-free. 

In other words, they can reimburse you without you or your employer being subject to tax.

There are some strict rules that separate this kind of reimbursement from being a qualified accountable plan from being a nonaccountable plan, which would subject the transaction to tax on both parties.

First, the arrangement has to be in writing. Next, it has to apply to every individual at the company and cannot only apply to executives or highly paid individuals.


This article is not intended to constitute tax or legal advice. For help regarding your specific situation, please consult a local advisor.

COVID-19: Have We Reached the Stock Market Bottom?

You’ve likely heard the advice, “Buy stocks now, they’re cheap.” 

While generally, yes, you want to “buy the dip,” because buying anything of value on sale is great! Why pay more when you can get the same thing for less?

Those of us around during the 2008 recession know how bad things got then, but over the last few months we heard more about how much money people made when they bought their investments at the deepest parts of the recession, when everything of value was much cheaper.

The big companies were bailed out, and most American companies not only survived, but did much better in the years following the recession.

Is This Time Different?

What was different during a recession caused by a debt-bomb is there was nothing stopping from businesses from resuming operations, nothing stopping an American out of work from going to their neighbor’s house and offering to shovel snow for twenty bucks.

While times were rough in 2008, there were no state or national quarantines. Companies burned through cash, but had options to curb the bloodletting.

This time, under quarantine, companies are burning through cash and are told they cannot even resume operations in some cases. Who knows how many companies will go under from not having a hint of cash flow for weeks or potentially months. 

This time could be different.

I am not advising against investing, just being cautious and making sure any companies you are considering can last a few months worth of cash burn without having any inflow.

This is a critical time, and having cash on hand may be a more stable plan than investing in companies that have no hope of getting you a return on capital for possibly months.

So Have We Reached the Bottom?

Stock prices will continue to be volatile for maybe many months. No one can say when the volatility will stop until the threat of the virus has let up. Unfortunately, they go hand in hand.

If the headlines get worse and not better, the market will dip further and further as more people retreat to cash for fear that mainline American businesses do not have the proper emergency funds to last a prolonged stop to operations.

Read the headlines, stay safe, and think critically. If the virus begins to subside and businesses are allowed to begin reopening their doors, cash flow can resume, and the thoughts of a national recession– or worse, depression– will also dissipate. 

At that time, stocks will likely still be undervalued and you can have your pick.

But what do you think? Will this be long-lasting, or do we have nothing to fear?

Sound off in the comments below.

 

This article is not meant to constitute legal or tax advice. For help regarding your specific situation, please consult a local advisor.

Why Record Depreciation?

For a new business, few things are more important than knowing your numbers and making sure you’re either profitable or improving the possibility of being profitable, especially early on when money is generally tight.

One of the biggest headaches for a business owner is understanding why their accountant insists on putting in a phantom expense on the profit and loss. Depreciation shows up without fail every month, hurting your perceived profitability.

So Why Do I Have to Track and Record Depreciation?

The main reason recording depreciation is so important is because it represents the wear and tear on your long-lasting property, plants, and equipment. Even though it may not feel like a real expense, it very much is. 

Accounting is not a perfect language, but depreciation is the best way us accountants could think of to show the effects of wear and tear over time. 

Spreading the expense of a large purchase over many years on the profit and loss statements ensures that one year’s profit and loss statement is not seemingly severely under-profitable while future years are seemingly over-profitable. 

Spreading this out over many years and showing the expense against each subsequent period’s income better reflects the utility of a large purchase and its wearing down over time.

Is There Any Other Reason to Track Depreciation Expense?

Another big reason to track property, plant, equipment and their subsequent depreciation schedules is for capital expenditure planning.

Capital expenditure planning is essentially the planning for large purchases. Looking at a depreciation schedule periodically shows the wearing down of large purchases and when to expect to have to replace them with new ones.

Obviously these purchases are expensive, so it’s important to plan how to finance them, either through saving up the money or potentially obtaining financing from a bank or line of credit.

 

Thank you for reading, and to have your question featured in a future post, please leave a comment below!

I Received a 1099-R for a Rollover. Is it Taxable?

Earlier the previous year you moved money out of one retirement account and into another; most commonly this happens when a person leaves their job and moves their money from their 401(k) into their new employer’s retirement plan, or into an IRA.

The transfer went smoothly, going directly from one account and into another. 

But then something weird happens; after the first of the next year, you receive a tax form that references your rollover.

But that doesn’t make sense, right? You completed the rollover specifically so you would not have to pay any tax. After all, that is what those retirement accounts are for!

And you’re right! Assuming the rollover was completed correctly, and was done as a trustee-to-trustee transfer (from one brokerage company to another), and the rollover was not from a Traditional account to a Roth, then you will pay no tax.

So Why Did I Get a 1099-R Tax Form?!

Despite being nontaxable, the rollover is still a reportable transaction for your tax return. 

Check to make sure that there is a Code G in Box 7 Distribution Code(s). This code signifies that a rollover was completed properly. 

If you think the rollover was done properly and there is not a code G, contact your brokerage company to see if you can have the 1099-R reissued correctly.

So How Do I Report the 1099-R on my Tax Return?

To report the rollover, write in the line that says Pensions and Annuities the full amount of the rollover. In the box next to it- Taxable Amount- write in 0, unless you have other taxable pensions or annuities to include in that line. 

On the line in between these two boxes, write in capital letters ROLLOVER. This should, hopefully, signify to our friends at the IRS that this transaction is indeed a rollover.

To ask your questions, please leave a comment below.

 

This article does not constitute legal or tax advice. For help regarding your specific situation, please consult a local advisor.

I Was Given a 1099. What Do I Do With It?

Most Americans work for an employer and that’s it. When you work for an employer, you generally receive a W-2 tax form and, if that is all you have for the year, filing your taxes can be fairly straightforward.

Although, more commonly now, many Americans are opting for freelance or gig work. This could be their full-time “job,” or for many it is just to supplement their day job income.

When you work for someone and are not classified as their employee, you will generally be given a 1099-MISC at the end of the year in place of receiving a W-2.

On a 1099-MISC form you will likely notice something a little different about it from the usual W-2: More of the fields are likely to be blank.

The reason for this is the employer is generally not required to withhold any federal income tax or FICA taxes from your pay. In addition to this, they generally do not pay any fringe benefits like health insurance or offer any 401ks to their contractors.

But your question is not just what this form is, but what to even do with it. Well, if you were not an employer’s employee and box 7 Nonemployee Compensation has an amount in it, then this might come as a surprise: You’re a business owner!

Yes, if you are not an employee then by default you are a contractor and the employer is actually your client.

There are a few drawbacks and also a few pleasant features about being a contractor. 

The biggest drawback is that the company will not withhold your tax liabilities and you are expected to pay them yourself out of your earnings. On top of this, you are also expected to pay twice as much FICA taxes as an employee. 

The reason for this is there is an employer’s portion of Social Security and Medicare taxes as well as the employee’s portion. Each portion is currently 7.65% of your earnings. Together, it is 15.3% of your earnings. As a contractor, you must pay both portions yourself.

As for your tax return, the amount from the 1099-MISC will be reported on Schedule C Profit or Loss From Business, under Gross Receipts. Unlike an employee, you are allowed to deduct unreimbursed expenses, including business costs of your cell phone and mileage, against your earnings.


This article is not meant to constitute legal or tax advice. For help regarding your situation, please consult a local professional.

Should You Change Your Investing Strategy Because of the Coronavirus?

Big changes have unfolded over the last two weeks, and with those changes, came questions of recession, depression, or perhaps just a general market correction.
These changes have made a lot of us question our investing strategy; many of us are wondering how bulletproof the mutual funds or stocks we’ve chosen are, now that the world seems to be crashing down around us.
You may be wondering if you should move money into safer assets, like bonds or cash, or you might be wondering if you should switch to other, seemingly undervalued assets now that they’re “on sale.”
These are the wrong questions to ask.
It’s never a bad idea to evaluate your investment plan. It is, however, not a good idea to completely switch your investment strategy during a major market downturn while tempers run high and emotions cloud good judgment.
The selling price of all assets decrease during a recession or general market correction. During a correction is not the right time to wonder if you’ve fairly priced the assets you’ve bought and the soundness of your investment decisions.
You want to come up with your bulletproof plan before the proverbial sh*t hits the fan.
But to get to the specifics, if you sell your investments now because you’re feeling defeated, you’ll likely sell close to the bottom of the fair market value for stocks during the downturn.
If you have a home, you try not to sell it during the deepest parts of a recession because you will get far less for it than if you sell it during a time when real estate prices are up.
To stick with the real estate scenario, the fair market value of your home changes as quickly and as drastically as any stock, but this change is invisible because there is no ticker telling you at any given time what someone is willing to pay for your home.

Selling your investments now is exactly like selling your home because you get scared because someone made a low offer to buy it.

If you’re not sure what to do, meet with a financial professional and review your options.
Do not make any rash decisions. And work on creating a plan bulletproof enough that during the next downturn, you feel confident enough about your investments you don’t even reconsider it.

This article is not meant to constitute legal advice. For help regarding your specific situation, please consult a local professional.

What is a Balance Sheet? – “How to Price a Stock”

Welcome to part 1 of our series in How to Price a Stock. 

If you’re here, it likely means you’re interested in learning not only more about investing, but companies in general and how to find their true value.

One of the first financial statements we look at in trying to price a stock is the balance sheet. The balance sheet generally gives us the financial strength of a company at any given point in time. The balance sheet works as a “financial snapshot” of a company.

From the balance sheet, we can see three important things: the Assets that it owns, the Liabilities that it owes, and the difference between these two numbers, the Equity. The Equity in this situation works much like the equity you have in your home. 

As you pay down your debt, the equity you have in your own will generally increase because your equity is the difference between the fair market value of the house (your asset) and the amount still owed on the house (your liability). Looking at a balance sheet, it works much the same way. 

There are two ways to increase the equity of a company, increase its assets, or pay down its debts. Looking at which of these options a company chooses, gives us insight into its management, operational capabilities, and its general ability to be strategic or profitable.

If a company can pay down debt at the same time it increases the value of its assets, it generally is in a more strategic position than companies handling their situation by only doing one or the other.

A balance sheet will generally be set up as follows:

Balance Sheet
as of December 31, 2019
Assets
Cash $1,000.00
Accounts Receivable $2,000.00
Inventory $5,000.00
Equipment $10,000.00
Total Assets $18,000.00
Liabilities
Accounts Payable $2,000.00
Loan Payable $5,000.00
Bonds Payable $5,000.00
Owner’s Equity
Stockholder’s Equity $6,000.00
Total Liabilities and Owner’s Equity $18,000.00

 

Note that the Assets balance to the total of the Liabilities and Owner’s Equity. Hence, the term Balance Sheet. 

Grasping the concept of a balance sheet is one of the first and most crucial concepts on the path to being able to do any kind of financial analysis and understanding a company’s capital structure (where it gets its financing from).

From here, we will be looking at what to do with the information from the Balance Sheet and why we should even care about it.

 

This article does not constitute financial or legal advice. For help regarding your specific situation, please consult a local advisor.

Can I Deduct Health Insurance If I’m Self-Employed for Taxes?

The government outlines certain expenses that a self-employed person is allowed to take against their earnings, some explained explicitly and some implicitly. 

The general rule is that any expense is allowable if it is “ordinary and necessary” to that person’s trade or business. As you can see, that is vague.

However, health insurance is something that, up until recently, not only felt like a necessity, but if you wanted to avoid a tax penalty it was a necessity. So, obviously, there were and are certain things that the government allows to help with the high cost of obtaining health insurance.

Most people in the United States obtain their health insurance through the workplace, where it is not only much cheaper for group rates, individuals and their businesses are allowed to pay for the health insurance expenses on a pre-tax basis, meaning essentially that the money used for the health insurance premiums are not taxed.

So, if you are not employed through a normal workplace, and instead are either a contractor, are self-employed, or otherwise own a business, what are your options? 

You can’t necessarily easily obtain group health insurance coverage, so that is likely not an option. You can’t pay on a pre-tax basis, because you don’t have an employer paying you a wage to not withhold taxes from, so you can’t do that.

So what kind of benefits for health insurance has the government concocted for you?

Now, as a self-employed person, you can’t take health insurance expenses like a normal expense on your Schedule C, or partnership return, or S-Corporation return.

However, you still can deduct the expense. Health insurance premiums are taken as an adjustment to income, not as an expense on the business part of a tax return. The reason for this is, you cannot deduct more health insurance expenses than you have net self-employment income. 

In other words, the deduction for health insurance for a self-employed person is limited to their net business income. Essentially, the expense of health insurance cannot create a business loss, only reduce business income to $0.

While it is great that health insurance for the self-employed has some tax advantages, self-employed people generally still lose out on preferential group rates. However, if you do a little digging, you can find groups that band together self-employed individuals, freelancers, and contractors to receive the group rates for insurance. 

For questions or further discussion, please leave a comment below.

 

This article does not constitute legal or tax advice. For help regarding your specific situation, please consult a local advisor.