What Are Unique Tax Deduction Situations for Clients With Multiple Income Streams?
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What Are Unique Tax Deduction Situations for Clients With Multiple Income Streams?
In the complex world of taxes, accounting professionals with titles such as CPA and CEO encounter a myriad of unique deduction scenarios, especially for clients juggling multiple income streams. From leveraging small business tax advantages to combining rental and business deductions, here are four distinctive insights shared by seasoned experts.
- Leverage Small Business Tax Advantages
- Detail Vehicle and Health Deductions
- Audit Income Stream Structures
- Combine Rental and Business Deductions
Leverage Small Business Tax Advantages
One unique tax deduction situation I've encountered involved a high-income client with multiple income streams (W-2, rental properties, stock portfolio) looking to lower their tax liability. High-income earners often seek ways to diversify their income streams, build wealth, and reduce their taxes. After discussing options with this client, it became clear that their entrepreneurial mindset fit well with investing in a small business.
Investing in a business—whether starting your own, investing in an independent business resale, or buying a franchise—can provide significant tax advantages. In the first few years, a small business often operates at a loss due to startup costs and accelerated depreciation of fixed assets. This non-passive loss is reported on the owner's personal tax return. Since it's a loss, it becomes a deduction against their total income, reducing their adjusted gross income (AGI). The AGI includes their W-2 income, rental income, stock portfolio income, and small business income.
For my client, this reduction in overall income consequently lowered their tax liability, resulting in a smaller balance due. Additionally, this strategy can help similar individuals earn a higher refund.
Detail Vehicle and Health Deductions
In my experience as an accounting professional, I encountered a unique tax deduction situation involving a client with multiple income streams from a full-time job and several side businesses. As a CPA candidate, here are some of the most unique and important aspects I navigated:
Vehicle Expense Allocation: Maintaining detailed mileage logs to allocate vehicle expenses (fuel, maintenance, depreciation) across different business uses, which allowed for precise deductions. This involved meticulous record-keeping and use of IRS Form 4562 for depreciation and amortization.
Health Insurance Premium Deductions: Utilizing the self-employed health insurance deduction for the client's freelance business, even though they also had employer-provided health insurance from their full-time job, by demonstrating the additional coverage was necessary for the self-employment. This was detailed in IRS Form 1040, Schedule 1.
Inter-Business Transactions: Managing and documenting transactions between the client's various businesses, such as the freelance graphic design service creating promotional materials for the craft business, to ensure proper expense and income reporting. Proper documentation and use of IRS Form 1099-NEC were essential.
Rental Property and Business Use Overlap: Navigating the complexities of deducting expenses for a home office located within the rental property while maintaining compliance with rules regarding rental income and property management expenses. This involved using IRS Form 8829 for business use of home and Schedule E for supplemental income and loss.
Unique Revenue Streams: Leveraging lesser-known deductions like the Qualified Business Income (QBI) deduction for eligible income streams, ensuring each business's income was accurately assessed for maximum benefit. This required a thorough understanding of IRS Form 8995 for QBI deduction.
Remember, navigating taxes with multiple income streams requires organization and attention to detail. By carefully considering these points and consulting with a tax professional, you can ensure a smooth and compliant tax season.
Audit Income Stream Structures
When a client has multiple streams of income, the first thing I actually look at is their structuring. That is, if they're flipping houses, selling products online, and part of a joint venture, for example, I make sure to triple-check the structuring of every entity/income stream. Questions I look to answer: Is the house-flipping LLC set up as a Partnership, S-Corp, or Single Member LLC? Usually (if net income is high enough), the S-Corp makes the most sense to avoid the self-employment tax imposed on Single Member LLCs and Partnerships. If they're selling products, I audit their systems and compliance to ensure they're up to date on sales tax, tracking nexus in other states, and separating the online sales activity from all others since that income is subject to sales tax while the rest isn't.
It's common for people to use one LLC for multiple projects, and when it comes to sales tax, a state will want proof that big chunks of mixed income are not 100% subject to sales tax. So, at a minimum, I make sure they're separating the entities by liabilities/business type. Lastly, with the JV, I make sure to read the operating agreement and set up the holding interest in an S-Corp to dilute any self-employment tax from the partnership itself.
Combine Rental and Business Deductions
I have a client with income sources as numerous as a millionaire's yacht. This man was a true multitasker—he balanced a main job, a supplementary income source, and multiple rental properties. Managing all those deductions felt like trying to control a group of unruly cats! However, the twist was that he was utilizing one of his rental properties as a home base for his secondary job. This means he was able to deduct some of his mortgage interest, property taxes, and utilities. It was a pleasant surprise that the majority of people wouldn't consider.
