Taxes

In the world of real estate, the term 1031 exchange is a type of purchase that is allowed under Section 1031 of the United States Internal Revenue Code. The purchase allows either a business or the owner of an investment property to defer the federal taxes on certain real estate exchanges. 

The term comes from the Internal Revenue Code Section 1031 which allows the exchange of real property that is not being held primarily for sale for other business or investment property.

Section 1031 Explained

A 1031 exchange, also known as a like-kind exchange, is one that occurs when one investment property is swapped for another. These transactions are taxable sales but if you meet the requirements of a 1031 exchange you will have limited tax or no tax at the time of the exchange. Essentially you are changing the form of an investment without cashing out or recognizing a capital gain as the Internal Revenue Service would see.

Benefits of a 1031 Tax Exchange

A 1031 tax exchange has many benefits for the average property owner. The primary benefit of a 1031 exchange is that you can sell one property, buy another property and avoid capital gains tax through the transaction. Doing this can save you a substantial amount of money while allowing you to purchase a new property and sell another property. It also helps you to avoid paying what could have been a hefty tax amount.

Time Limits

There are time limits associated with a 1031 exchange that must be strictly adhered to. When completing an exchange a new property must be purchased within 180 days. Failing to stay within this timeframe could have dire consequences. When completing any 1031 exchange you must be sure to complete your new property purchase within the time limit.

Rules for 1031 Tax Exchanges

In addition to the time limits, there are rules associated with 1031 tax exchanges that you should be aware of. 

The first and foremost rule is that the replacement property should be of equal or greater value than the original property. You should not get a lower-cost property when doing a 1031 tax exchange. 

Second, you can purchase up to three properties without regard to their fair market value as long as their aggregate value does not exceed 200 percent of your original property’s sale price. 

Third, you have to identify your replacement properties within 45 days of selling the original property. Finally, the replacement property (or properties) purchase must be completed within 180 days of the initial property sale.

How Can a 1031 Exchange Help With Taxes

A 1031 exchange can help you with taxes by allowing you to avoid short-term capital gains taxes. Capital gains are the profits made from selling an asset such as a car, land, house, or boat. Typically, an individual is taxed on these profits but by completing a 1031 tax exchange you can avoid this tax entirely.

Other Benefits of a 1031 Tax Exchange

There are several benefits associated with a 1031 tax exchange – one being that it resets the clock on depreciation. Depreciation is the percentage of the total cost of an investment property that is then written off each year. It also allows you to consolidate multiple properties into one property for the purpose of estate planning. 

Alternatively, it gives you the option of dividing one single property into multiple assets. Perhaps most importantly a 1031 tax exchange allows you to defer the capital gains tax. This frees more capital for investing in the replacement property.

Getting The Most Out Of a 1031 Tax Exchange

There are several benefits associated with a 1031 tax exchange and it is important that you take advantage of as many as possible. Getting the most leverage out of the exchange can help you in the long run with taxes, other purchases, and more. 

In order to learn more about this type of tax exchange and find out how they can help you talk to a qualified and experienced tax attorney. The tax attorneys at Wilson Ratledge can review your unique financial situation and determine how a 1031 tax exchange can be used to help you. We can help you in planning your course of action, fill out the documentation for you, communicate on your behalf, and much more. 

If you have more questions or are ready to move forward with a 1031 tax exchange, reach out to our office today to schedule a consultation!

Tax extensions are an additional period of time granted to a tax filer to prepare and file their taxes. In addition to giving a tax filar additional time to file their taxes, a tax extension gives an individual an opportunity to better review their forms prior to filing. 

A tax extension gives individuals six extra months to file their taxes. This extension pushes the tax filing deadline from April 15^th to October 15^th. Requesting a tax extension can aid an individual or couple who realize they are not prepared to file their tax returns by the Internal Revenue Service’s deadline.

Extensions Can Increase Accuracy

Tax extensions have multiple benefits with the first benefit being an increase in the overall accuracy of the tax return. Mistakes can often occur at the height of the hectic tax season leading to delays in processing tax refunds and increasing the chances of being audited. 

These mistakes are sometimes attributed to stressed-out filers or rushed accountants and those errors can ultimately cost the tax filer money. Requesting an extension can help ensure that the tax return is accurate making the tax season a smooth one for you and your family.

Extensions Can Save Accountant Fees

Accountant rates tend to increase during tax season and they often spike sharply the week of the filing deadline. Seeking help during the height of the tax season can be costly. Filing for an extension allows taxpayers to save money by giving them an opportunity to consult with an accountant outside of the busy tax season. 

Taxpayers can expect to save a significant amount of money in accountant fees if they request an extension moving their tax filing deadline back. These savings can add up with each tax season and become very beneficial.

Most Tax Extensions Are Automatically Approved

Most tax extension requests are honored automatically. Certain people like deployed active duty military members receive extensions without having to file form 4868. Simply make sure your information such as your legal name and social security number are correct. Errors on the form could result in rejections delaying your ability to receive approval quickly or result in a rare rejection.

Tax Extensions Can Reduce Late Penalties

The IRS imposes late penalties when a tax return is filed late without an extension being requested. There are two types of late penalties that can be charged to the taxpayer:

1. 5% fee on any tax due for each month or fraction of a month
2. Late payment penalty of between 0.5 and 25%.

If you request an extension, you only have to pay one of these fees regardless of how much taxes you owe. If you pay estimated tax when filing your extension, there is generally no penalty at all.

Extensions Can Improve the Accuracy of The Return

When a tax filer is hurrying to meet a looming tax deadline the chances of them making a tax filing mistake increases. Requesting an extension gives you extra time to go over the return to ensure accuracy prior to sending it to the IRS. The extension can provide you with an opportunity to avoid errors and improve the overall accuracy of your tax return.

Extensions Can Preserve Your Tax Refund

There is a three-year deadline for receiving a tax refund check from the IRS if you are owed one. This three-year period begins on the original filing deadline for that tax year which is typically April 15^th. 

The statute of limitations is extended by six months when an extension is filed for. Even if a taxpayer is behind on submitting tax returns they can benefit from this extension and preserve their ability to receive a tax refund.

Extensions Cut Down on Confusion

The request to file a tax extension signals to the IRS that you are required to file a tax return for the season. This can reduce confusion if you are a person who does not always file a tax return. Requesting a tax extension lets the IRS know that you meet the requirements for filing and avoids some potential issues that might otherwise arise.

Contact Our Tax Controversy Attorneys Today

If you are having issues with audits, IRS collections, or any other tax-related controversies, it’s important that you contact a qualified tax attorney today. The tax controversy attorneys at Wilson Ratledge are here and ready to help. Contact our office today to schedule an initial consultation so we can help guide you through the resolution process with your tax issues.

For many people with straightforward finances, taking care of their taxes and any tax hurdles they may encounter is often as simple as scheduling an appointment with their accountant or CPA. 

However, in certain circumstances, tax issues can become so complex that even your accountant may not be able to handle problems that arise. In this case, it is often necessary to consult with a tax attorney. Yet, you may find yourself wondering what a tax attorney is, how they differ from an accountant, and how you will know if you need a tax attorney.

What Does A Tax Attorney Do? 

While you likely work with an accountant at least annually to help you stay on top of your income/business taxes, you are not alone if you are unfamiliar with what a tax attorney does. While accountants typically review and examine financial records and provide tax advice, tax attorneys can handle more complex tax issues. 

A tax attorney is a lawyer who specializes in tax law and can help people arrange their finances to optimize their tax situation. They can also assist people who encounter legal problems with their taxes. 

However, it is essential to note that a tax attorney will not help you file your taxes. So, when would you need to hire a tax attorney? Keep reading for a look at a few situations where you could benefit from consulting a tax attorney in North Carolina.        

Situations When You May Need A North Carolina Tax Attorney

You Are Being Audited By The IRS

If you are being audited by the IRS, this does not necessarily mean that you’ve done something wrong. It simply means that the IRS is doing a formal examination of your tax records. Most tax audits are simple and can be handled by a certified public account. 

However, if you disagree with the audit results and wish to dispute them, or the IRS takes you to court during the audit, you must consult a tax attorney. You must work with a tax attorney in this situation, as an experienced lawyer can be instrumental in helping you navigate the complex world of IRS audits. 

Let’s face it unless you have a background in finance and tax law, trying to understand a tax audit, let alone appeal the IRS’s findings, can feel impossible. Fortunately, a tax attorney can communicate with the IRS on your behalf, removing much of the stress of appealing an IRS case from your shoulders. 

They can research your case to help you find a solution, they can represent you should your case go to court, and they can also help you negotiate a settlement with the IRS. Do not try to handle a complicated IRS audit on your own. If you are planning to appeal your case or your case is being taken to court, it is essential that you work with a tax attorney.

You Owe Back Taxes

If, after filing your taxes or completing an audit, you find that you owe a significant amount of money in back taxes to the federal, state, or local government, you may want to consider consulting a tax attorney. Tax attorneys know tax law in ways that accounts don’t, and they may be able to help you work with the IRS, or other government agencies, to help you find a solution to your current tax problem. 

A tax attorney may be able to negotiate on your behalf to work out a formal agreement to help you settle your tax debt. Tax attorneys know tax law inside and out, and they may even be able to help you settle your debt for less through an offer in compromise or a penalty abatement. They can also help you work out a deal to make installment payments on any remaining tax debt if you owe more than you can afford to pay upfront. 

You Are Starting a Business

Of course, consulting a tax attorney can also prove instrumental in helping you to avoid problems with the IRS, particularly if you are planning on starting a business. When you are in the process of starting a business, you will have to decide what type of business to establish, such as an LLC, an S-Corp, or a C-Corp. 

Working with a tax attorney when setting up your business is critical. You will want to make sure that you understand the type of business you are establishing and the tax responsibilities that come with it to avoid problems with the IRS. 

It is then imperative that your work with a tax attorney when starting a business, as an attorney can help you to structure your business in a way that reduces your tax burden and potential liabilities, preventing you from encountering problems with the IRS in the first place.  

You Are Considering Buying/Selling a Business

You should also consult a tax attorney if you are considering buying or selling a business in the near future, as a tax attorney can help you structure the sale in a way that minimizes your tax burden. 

For instance, someone selling a business will want to structure the sale in a way that minimizes capital gain, while someone buying a business might want an allocation that helps them recover the purchase price faster through depreciation. 

The fact is that buying or selling a business can result in a complicated tax situation, and working with a tax attorney can help minimize the amount of taxes you pay while also helping to ensure that the sale is being handled properly, reducing the likelihood of an audit down the road.

You Are Looking to Create an Estate Plan

Considering that you have worked hard to establish yourself and earn all of the assets in your estate, it is understandable that you would want to do everything to ensure that your assets pass to your heirs after your death with as little as possible being lost to estate taxes. 

Fortunately, only large estates valued at more than $12 million pay estate taxes. However, if you believe that your estate will be subject to taxation after your death, a tax attorney can help you devise estate planning strategies to minimize the tax burden placed on your estate. This can help ensure that as much of your estate as possible passes to your heirs. 

Contact Our North Carolina Tax Controversy Attorneys

There are many situations in which working with a tax attorney is necessary. These legal professionals have specialized knowledge and experience that can prove instrumental in helping you avoid encountering problems with the IRS. If you’re facing a situation with the IRS where you may need a tax attorney, contact Wilson Ratledge today at 919-787-7711 to schedule a consultation.

The 2022 tax season is upon us, and with it comes the typical anxieties that generally go hand-in-hand with dealing with Uncle Sam. Believe it or not, though, the IRS is not always out to get us: In some cases, it creates systems that help consumers recover from financial errors or setbacks.

One such example is known as Innocent Spouse Relief. This is a form of tax relief that can relieve you of your tax liabilities, interest payments, and penalties you may face if you file a joint tax return with a spouse or ex-spouse.

The IRS created this relief mechanism with the underlying justification of fairness: Generally, both spouses are held equally responsible for what they fie on their joint tax returns. However, arguably, it would be unfair to hold both spouses liable for an error made by only one. This is particularly applicable in situations in which the spouses separate or divorce and later, it becomes known that one spouse made an error on a tax filing, resulting in a substantial tax burden for the other spouse.

What Innocent Spouse Relief Does for Taxpayers

In short, Innocent Spouse Relief does three things – or, in other words, has three key benefits for you as a taxpayer.

1. It can relieve you from having to pay taxes, penalties, and interest stemming from a joint tax return that you filed with your spouse or ex-spouse.
2. It can help you avoid tax liability resulting from errors or mistakes that someone else made on your joint tax return.
3. Finally, it can relieve you of a financial burden if, by your spouse or ex-spouse’s fault, you’ve wound up with tax debt.

Types of Innocent Spouse Relief

Generally, both the IRS and some states offer a few different types of innocent spouse relief, namely:

Classic Relief

The most common type of innocent spouse relief, this applies to under-reported tax obligations that result in erroneously applied tax liability.

Relief by Separation

This applies in cases of separation and divorce, in other words, when an understatement of tax is allocated between you and your former spouse.

Equitable Relief

In some cases, relief is available for an understatement of tax as well as an underpayment. This type of relief may apply if someone doesn’t qualify for the first two types of relief but, nonetheless, should not be held liable for tax obligations.

How Do I Qualify for Relief?

Per the IRS, there are a few qualifications for innocent spouse relief:

First, you must have filed a joint tax return with your spouse or ex-spouse.

Second, there must have been some error on your return that resulted in an understatement of your tax liabilities. The IRS refers to these errors as “erroneous items” and in general, they include unreported income (any gross income you or your spouse received that you did NOT report), or incorrect deductions or credits claimed by you or your spouse.

Third, you must establish that at the time you signed the joint return you didn’t know (and had no reason to know) that the tax was understated. The law is unclear on what it means to “have no reason to know,” and different states hold claimants to different standards. For instance, some state laws say that the spouse is not entitled to relief unless he or she has carefully reviewed the tax returns and personally investigated any suspicious sections in it. Others, however, think this standard is too high and apply a looser standard to determining whether someone qualifies for relief. Regardless, while most tax disputes place the burden of proving noncompliance on the IRS, the “lack of knowledge” portion of the rule forces taxpayers to prove that they did not know of the errors – otherwise, they’ll likely be held liable for the tax obligations.

Fourth, considering all the circumstances, it would be unfair to hold you liable for the understatement of tax. The IRS will consider all facts and circumstances in determining whether it’s unfair to hold you liable for the tax obligations. Some factors the IRS will consider include, among others:

• Whether you received a substantial benefit from the understatement of taxable income
• Whether your spouse deserted you
• Whether you and your spouse have been separated or divorced
• Whether you received a benefit on the return from the understatement

Different courts and different states may apply different standards, however, so be sure to consult an experienced tax attorney if you think you may qualify from this type of relief or if the IRS is coming after you for alleged tax obligations.

And finally, you and your spouse (or former spouse) have NOT committed fraud in any way – for instance, by joining in a scheme to defraud the IRS. Fraud will cancel out any right to relief.

Contact The Experienced Tax Attorneys at Wilson Ratledge

If the IRS is after you for a tax debt that started when you filed a joint return with a spouse, and you don’t know what your spouse or ex-spouse did, we can help. The Wilson Ratledge team of experienced tax attorneys can help you gather the right facts, structure them into a valid case, and present evidence to the IRS to prove your statements.

At Wilson Ratledge, the tax controversy attorneys represent taxpayers in disputes with the IRS and the North Carolina Department of Revenue. They regularly handle disputes involving tax liens, audits, and collections, as well as other various aspects of tax controversy and litigation. For assistance, contact one of the experienced North Carolina tax attorneys today at 919-787-7711 or via the contact form below.

North Carolina is a great state to live in. Whether you are an individual who has just moved here or a business owner, some changes to the tax law that you may not be aware of could affect your finances. This blog post will introduce those changes and offer advice on how to adapt after moving to the Old North State.

1. Sales tax

In a move to make the sales tax system fairer, effective October 1st, 2020, North Carolina State Sales and use tax is currently at 4.75% plus an applicable local rate ranging between 6.75% to 7%. Additionally, items or goods at the general rate attract an additional local option sales tax rate capped at a flat rate of 2.25% for all counties in North Carolina.

Under the NC sales tax, goods subject to this levy include physical property, like furniture, home appliances, and motor vehicles. On the other hand, groceries, prescription medicine, gasoline fall, electricity storage, and consumption are sales and use tax exempted. 

Sales Tax on ‘Remote Sales’ in NC is also capped at 4.75%. However, the levy applies if the cumulative sales exceed $100,000. You are also required to charge sales tax if you did 200 or more separate transactions in North Carolina within the tax year understated or the previous year. 

2. Income tax for new NC residents

Under North Carolina law, a person who moves to the State for a “definite term or particular undertaking” and abandons the intent to return to their original state of residence is subject to North Carolina income tax. This provision covers all income earned or derived from any source in North Carolina after all applicable deductions and exemptions. This includes salary, wages, commissions, and self-employment such as business income. The new resident’s income is reported on Form D-400, Part B.

The exemptions under North Carolina law that may affect your tax bracket include retirement income received during the year but did not work in NC all year round, or if you worked fewer than 6 months in the state. You’ll only be taxed on the income earned in NC. Other exemptions include unemployment benefits and qualified military wages earned outside North Carolina.

According to the 2020 Personal Taxes Bulletin, a taxpayer can also take credit for personal income taxes paid to their previous state of residence. However, the amount of the credit cannot exceed the North Carolina tax liability. 

3. State income tax deduction for federal taxes paid

The state income tax deduction for federal taxes paid is limited to $10,750 per individual or $16,125 for the head of household and $21,500 for married taxpayers filing jointly. This restriction applies only to the extent that the taxpayer itemizes deductions on Schedule A (Form D-400). It should also be claimed in the taxable year 2017 and each taxable year after that.

4. NOL carryover deduction

As of June 30th, 2020, Governor Cooper assented into law Session Law 2020-58 House Bill 1080. The new Notice under the State and Federal provisions suspended the 80% NOL carryforward deduction limit until the end of the tax year 2021. This suspension also covers NOLs incurred during the tax years 2018, 2019, and 2020.

For this reason, filers can now carry over NOLs indefinitely without worrying about the 80% limit. This reduces tax liability by allowing the business owners (S-Corps & C Corps) to file for NOL deductions on their personal income tax returns.

5. Corporate income tax

The North Carolina Senate, on June 10th, 2021, passed House Bill 334 with their own amendments. The amended Bill that seeks to reduce the state’s 2.5% corporate income tax, provide a moratorium of three years between 2024-2026 before the rate is reduced by 0.5% and completely phased it out by 2028. This law is meant to attract foreign investments, resulting in job creation and growth for the state’s economy.

Contact Our North Carolina Tax Attorneys

The tax attorneys at Wilson Ratledge can help you navigate all your tax issues. We understand that it can be very complicated or stressful to deal with tax controversies or tax planning. This is why we do all we can to help our clients and ensure that they have nothing to worry about. Contact us today for more help in adjusting to the local tax laws as you continue settling in North Carolina.