As election day looms ever closer, it’s time to make some very important decisions—namely, which candidates and statutes you will vote for on your ballot. While there are some who understand the ins and outs of the political world, many of us have a limited knowledge about the countless issues that are touched on during an election season.
One such topic is taxes.
Lately, there have been numerous tax terms thrown around in the media and on the debate stage. In order to make an informed voting decision on November 8th (or earlier if you plan on beating the lines with early voting), continue reading to learn what these tax-related terms mean and how they affect you and your business.
Tax Credits vs. Deductions
Both tax credits and tax deductions mean there’s more money left in your account come tax season (depending on your specific tax rate), but you’ll typically fair better from a tax credit. Tax credits work to make your bill to the IRS lower; whereas, a tax deduction will make the amount of taxable income you have lower.
For example, let’s say you have a taxable income of $100,000 and are in the 28% bracket (meaning the government takes 28% from your taxable income). If you receive a $500 tax credit then your final amount owed ($28,000) will be reduced by $500, putting your tax bill at $27,500. If, however, you’re going the deduction route, a deduction of $500 from your total taxable income will only help save you $240 for total bill of $27,860.
Net Operating Loss (NOL)
NOL is a provision for businesses that have taken a big loss to help offset their taxable income. This loss can be spread out over a number of years, with bigger losses being spread out over a longer period of time.
Taxable Income vs. Gross Income
Gross income is the total amount of money your business earns; whereas taxable income is the percentage of this amount that you are required to pay taxes on. The difference between these values depends on how much you’re able to deduct. This number is derived by subtracting “above-the-line deductions” from your gross income and then subtracting either the standard deduction or itemized deductions—whichever applies to you.
Fiduciaries are people who are trusted to act in the place of a company, organization or person in order to protect them financially.
The Alternative Minimum Tax (AMT)
AMT is an income calculation that originated from the concern that the very wealthy were not paying their “fair share” of taxes. In order to calculate AMT, a number of write-offs and exclusions are calculated back into taxable income. This figure is then taxed by either 26 or 28 percent. If this AMT number is more than taxes calculated in the normal manner, then the AMT figure is considered paid.
The problem with using AMT is that the taxable rates have not grown with the times. Currently, the highest two tax rates (35% and 39.6%) are so far above the AMT percentages that people rarely pay the AMT. As a result, many believe that the super-rich aren’t paying enough taxes while middle-income people who fall into the same category end up paying higher rates.
Debt Forgiveness vs. Debt Parking
Debt forgiveness refers to the practice of having large debts forgiven and then counted toward a person’s taxes as income. This is possible as long as creditors can no longer collect on the debt. Debt parking, on the other hand, is a process wherein a person’s debt is transferred to a third-party and the debt is allowed to sit there without having to be paid on.
“Carried interest,” according to the Tax Policy Center, occurs when income from a private investment fund is treated as if it were capital gains on a tax form. Generally, carried interest is regarded as an unfair loophole as capital gains are taxed using a lower rate than other incomes. Both presidential candidates have vowed to eradicate carried interest.
Limited Liability Companies (LLC) and S corporations (S Corp)
An LLC is a business entity in which the losses and/or profits of a business are passed along to its owner/s. LLC business owners are then responsible for reporting these figures on their own income tax form rather than a business form. This business model gives owners a certain amount of protection from lawsuits that may arise from business ventures.
S corporations give businesses protection from being doubly taxed. Rather than both the corporation and shareholders being taxed, with an S corporation only the shareholders are taxed. S corps are like LLCs in that profits and losses are passed along to the shareholder’s own income taxes.
The Choice is Yours
As Americans, the right to vote is a big responsibility. The most important piece of information you can take away from reading this the importance of being an informed voter. Regardless of your political affiliation, conscious voting is the single best way to help move the country forward in the direction you believe is best. Take the time to consider your options and make a decision that is best for yourself and your business.
For more information about business taxes and incorporation, turn to MaxFilings. Feel free to contact us or continue browsing our Online Incorporation Knowledge Center articles: