Skip to main content

Save 75% on Vendor Payment Costs – Join our webinar and get 1 month free trial!

Register Now!
Learn More

Daily Archives: March 19, 2025

Estimated Tax Payments

Posted on March 19, 2025 - 1:01 pm by

Estimated tax payments are periodic payments made to the IRS by individuals and corporations that do not have taxes automatically withheld from their income. This applies primarily to self-employed individuals, freelancers, small business owners, and independent contractors. Income from interest, dividends, alimony, capital gains, and prizes may also require estimated tax payments. 

These payments cover not only income tax but also self-employment and alternative minimum taxes. The IRS requires estimated taxes to be paid quarterly- April 15, June 15, September 15, and January 15. Failure to pay on time or in full may result in penalties.  

Who Pays Estimated Tax Payments? 

Estimated tax payments are required for individuals and businesses that do not have taxes automatically withheld from their income. This includes: 

  • Self-Employed Individuals & Business Owners – Sole proprietors, partners, and S corporation shareholders must make estimated tax payments if they expect to owe $1,000 or more when filing their return. 
  • Corporations – Must make estimated tax payments if they expect to owe $500 or more when filing their return. 
  • Prior-Year Tax Liability – If you owed taxes last year, you may need to make estimated tax payments for the current year. 

How to Calculate Estimated Tax Payments 

To calculate estimated taxes, you must determine their anticipated tax liability based on projected income, deductions, and credits. This can be done using IRS Form 1040-ES, which provides worksheets to help estimate tax payments accurately. A common method is to use the prior year’s tax return as a reference and adjust based on current income. 

For example, a freelancer who expects higher earnings this year than last should increase their estimated tax payments accordingly. Conversely, if their income decreases, they can adjust their payments for future quarters. 

Estimated Tax Payment Schedule 

Estimated taxes are paid quarterly according to the IRS schedule: 

  • April 15 – Covers income earned from Jan. 1 to March 31 
  • June 17 – Covers income earned from April 1 to May 31 
  • Sept. 16 – Covers income earned from June 1 to Aug. 31 
  • Jan. 15 (following year) – Covers income earned from Sept. 1 to Dec. 31 

If these deadlines are missed, you may face penalties, even if you are due a refund at year-end. 

Allocation of Deductions

Posted on March 19, 2025 - 7:43 am by

What is the Allocation of Deductions?

The allocation of deductions involves the apportioning of deductible costs to different time periods, tax entities, or cost centers based on how much they have been used or how beneficial they are to earning income. Doing so helps to meet tax laws and accounting standards by ensuring that deductions are not claimed outside their corresponding period. Depending on the type of expense and tax laws, a business might have its own accounting practices that determine the method of allocation.

 

Purpose of Allocation of Deductions

It prevents informed businesses and individuals from running afoul of the law by claiming the tax benefits that they are not entitled to due to incorrect expense allocation. This can also prevent wasting money through overreporting or underreporting of deductions by ensuring there is no error in tax filing.

 

How is the Allocation of Deductions Calculated?

To allocate deductions, businesses determine the relevant expense (e.g., rent, utilities, or interest) and its relevance to various sources of income or tax periods. The allocation steps include:

  • Identify incurred total expenses (rent, interest).
  • Determine how much of the expense each department, project, or income source gets.
  • Allocate depending on benefit or usage.
  • Ensure accuracy in the allocation to reflect the actual benefit received.

 

Breakdown of Deduction Allocation in Various Situations

Allocation of Business Expenses: Rent and utilities expenses for a company running in many states could be allocated according to the income taxation in each state.

Allocation of Interest Expense: The loan interest that has been spent on a number of different projects would be allocable based on how much had been spent on the two projects, respectively. E.g. 60% for Project A, 40% for Project B.

Depreciation Allocation: Allocable depreciation is needed on a vehicle that is used exclusively for business and personal purposes.

Allocation of Shared Costs: Office rent can be apportioned to each department based on the proportion of space occupied (30% of the rent to the department that occupies 30% of the office space.)

 

Significance of the Allocation of Deductions

Through proper division and allocating business expenses, an individual or business is able to be more organized and efficient in every aspect of their finances.

  • Fulfill impressions of tax authorities: This helps in meeting business compliance with taxation laws, which helps businesses and individuals avoid penalties for having mismatched or unqualified tax returns.
  • Properly reflect costs: This enables both businesses and individuals to balance the expenses undertaken to earn an income accurately, leading to better quality financial statements as well as tax returns.
  • Prevent tax issues: This helps prevent the chances of missing or being deducted from taxes by taking over generous estimations when calculating taxable income.

Dividend Income

Posted on March 19, 2025 - 6:56 am by

What is Dividend Income?

Dividend income refers to the earnings received when a corporation shares its profits with the shareholders. These payments are typically made in cash but can also be in the form of a stock or other property. Companies usually pay dividends to reward shareholders and share a portion of their profits. 

Dividends can come from various sources including partnerships, estates, trusts, S corporations, or associations taxable as corporations. In some cases, a shareholder may receive a dividend even if no direct cash payment is made. This occurs when a corporation pays a shareholder’s debt, provides services, or allows the use of its property without compensation. Shareholders may also receive extra shares (stock distributions) or rights to buy more shares (stock rights), which can also qualify as dividends. 

 

Types of Dividend Income

For tax purposes, dividend income is classified into two types: qualified dividends and non-qualified dividends.  

Qualified Dividends 

Qualified dividends are taxed at lower capital gains tax rates rather than ordinary income tax rates, making them more tax efficient. 

To qualify, dividends must meet specific IRS criteria, including: 

  • Being issued by a U.S. corporation or a qualified foreign corporation. 
  • Meeting the holding period requirement, meaning the stock must be held for at least 61 days within a 121-day period around the ex-dividend date. 

Non-Qualified Dividends 

Non-qualified dividends do not meet the IRS requirements for qualified dividends and are therefore taxed at ordinary income tax rates. 

These dividends may include: 

  • Dividends from foreign companies that do not qualify as per IRS rules. 
  • Employee stock options dividends. 
  • Dividends paid on bank deposits and other financial instruments. 
  • Real Estate Investment Trusts (REITs) and certain mutual funds. 

Tax Rates for Dividend Income 

Qualified Dividends

Taxed at 0%, 15%, or 20%, depending on the taxpayer’s taxable income. These rates are aligned with long-term capital gains tax rates. 

0% – If your taxable income is up to $44,625 (Single) or $89,250 (Married Filing Jointly) for 2025. 

15%- If taxable income is between $44,626 and $492,300 (Single) or $89,251 and $553,850 (Married Filing Jointly). 

20%- If your taxable income exceeds $492,300 (Single) or $553,850 (Married Filing Jointly). 

 

Non-Qualified Dividends

Taxed at the ordinary income tax rates, which range from 10% to 37%, based on the taxpayer’s tax bracket. 

Depreciation

Posted on March 19, 2025 - 6:55 am by

What is Depreciation? 

Depreciation is an accounting method which spreads out the cost of a tangible asset over its useful life. This method recognizes the decline in the assets value usually due to usage or wear and tear. In simple terms, the more an asset is used, the lesser its value. This is done to ensure that the asset’s cost is equal to the revenue it generates. This method usually affects fixed assets such as buildings, office equipment, furniture, and machinery. 

Importance of Depreciation 

Depreciation is important in financial and tax accounting. It allows a company to allocate and spread out the cost of fixed assets over time for their financial reports. Since an asset will usually deteriorate and degrade with use over time, depreciation provides an accurate assessment of its value. 

It is also important in tax accounting because companies can recover costs through depreciation over time instead of deducting the full cost of a capital expenditure in the year of purchase.  

Under Section 179 of the Internal Revenue Code, a company can deduct the full or partial cost of qualifying assets in the year they are used (subject to specific limitations).  

Methods of Calculating Depreciation 

The method of calculating depreciation depends on the type of asset, financial reporting needs, and the tax strategy of the company. Here are some of the most common methods of calculating depreciation: 

Straight-Line Depreciation

The simplest and most widely used method of calculation. In this method, the asset’s cost is evenly spread over its useful life which results in the same depreciation expense each year. It is best for assets like office furniture. 

Units-of-Production Method

In this method, the depreciation depends on how much the asset is used. It is best for assets that wear out, such as manufacturing equipment and vehicles. 

Double-Declining Balance

This is an accelerated method that applies higher depreciation costs in the early years of the asset’s useful life. It is mainly used for assets that lose value quickly such as computers.  

Sum-of-the-Years’-Digits

This is another accelerated method. Similar to the double-declining method, it applies more depreciation in the early years of the asset’s life and less over time. It is used for assets that lose value quickly at the beginning of their life span. 

Capital Gains Tax 

Posted on March 19, 2025 - 6:50 am by

What is Capital Gains Tax? 

Capital Gains Tax is the tax imposed on the profit earned from selling investments or assets. For example, selling stocks, real estate, or other taxable assets.  

The amount it was purchased at, how long the holding period was (short-term or long-term), and the investor’s income level or tax bracket all help determine the amount of tax owed. It can also include other payments such as broker fees, commissions, etc. 

Short-Term & Long-Term Capital Gains 

According to the IRS, CGT can be classified into two broad categories based on how long the asset is held 

Short-Term Capital Gains

If an investment is sold within one year of its purchase, the profits are taxed as ordinary income tax rates which range from 0% to 37% depending on the investor’s tax bracket. 

Long-Term Capital Gains

If an investment is kept for more than one year before being sold, the profit is taxed at a lower tax rate which ranges from 0%, 15%, to 20%.  In some cases, high-income individuals may also be subject to an extra 3.8% Net Investment Income Tax (NIIT) on both short-term and long-term capital gains. This applies only if the gross income is over $200,000 for individuals and over $250,000 for married couples. 

Capital Gains Tax Rate (2025) 

Short-term capital gains are taxed according to ordinary income tax brackets. While, long-term capital gains are taxed at 0%, 15%, or 20%, based on the taxable income. 

Status/ Rates 0% 15% 20%
Single Up to $47,025 $47,025 to $518,900 Applies only to income above the 15% threshold
Married & Filing Together Up to $94,050 $94,050 to $583,750
Head of Household Up to $63,000 $63,000 to $551,350