TaxAssurances Blog

Executive Summary

Figuring out what to do after serving our country in the military can be challenging but it can also offer opportunities. Opportunities is what one 2022 TaxAssurances tax client pursued after serving in the military. In particular, they started a construction company that focuses on mostly commercial and not residential projects. This case study walks through the tax implications of those life changes.

Background

• In 2022 their total W2 income was $120k. Their military W2 income was $25k because they served in the military in only January and February. After that, they retired. $96.5k of their W2 income came from their new business.
• They are single with no dependents.
• They started a single shareholder LLC designated as an S corporation in 2022 in the construction and engineering industry with a number of employees and independent contractors. The S Corp had over $231k of revenue and just over $434k of business-related expenses. The difference of -$203k was reflected on their S Corp’s only K1, their page 2 on their personal schedule e, their personal schedule 1 and also their personal 1040.
• They received some interest and dividend income through 2 traditional brokerage accounts
• They had investment gains and losses in 2 traditional brokerage accounts. They did not have any crypto investments.
• They had $61k of military pension income.
• They lived in Florida for a month and a half and retired from the military. They did not have any non taxable combat pay. From Feb until December they lived in DC.
• They own their home in DC.
• They did not make any charitable donations.
• They had rental property in VA. They purchased the condo rental in 2016. They had $27k of rental income and $45k of related expenses in 2022. That -$17k was reflected on the schedule e, their schedule 1 and their personal 1040.
• They had partnership income and losses from a rental property based in PA.
• They did not receive any social security income.

Results

• They received a federal refund of just over $19k
• They received a DC refund of just under $1,000
• Florida has no income tax so no return was needed for the W2 income made in the state.
• The VA return was filed for informational purposes only because they did not have any income that was taxable after accounting for losses in their real estate investment
• They paid more than enough in W2 and 1099 R federal tax withholdings
• It was more beneficial to take the itemized deduction over the standard deduction even though they had no taxable income due primarily to their losses in the S Corporation.
• They had a loss on the sale of their partnership reflected on their schedule D, their schedule 1 and their 1040.

Challenges & Solutions

The client had too many tax consideration to handle on their own. The tax return was just to complicated for them. They knew they needed to report the information. They just didn’t know how and how it all worked together. That’s why they needed TaxAssurances.

Solution #1

Taking time and getting all the relevant tax information was the key in preparing this tax return. This was not a return that could be prepared in one day. We needed time to not just go over the information that the client had but also required us to have deeper conversations about the timeline and specific details about what occurred during the year. My job as the tax professional was to ask ever more probing questions in an effort to not only understand everything but to try and uncover not only other potential income information but to try and find other business deductions. We accomplished that, hence the refunds.

Solution #2

As the S Corp becomes profitable and they owe taxes in the future, they want to make sure they have enough either to pay it off in one payment or can set aside enough to make installment payments. They can also make estimated tax payments during the year so they don’t have to wait for a tax bill to come at the end of the year.

Conclusion

This case study illustrates how starting a business after military service can lead to complex tax situations. The client’s mix of income sources and business activities resulted in losses that offset other income, leading to substantial refunds. The keys to maximizing the client’s tax outcome were thoroughly gathering information, understanding how different activities interacted, and finding additional deductions. As the business becomes profitable, estimated tax payments and planning for tax liabilities will become crucial. With proper tax preparation and planning, transitions from military service to entrepreneurship can be managed for optimal tax results.