Tax Tips for Owners from Experts
A Guy Walks in a BAR…
The IRS’ final tangible property repair regulations are effective for tax years beginning Jan. 1, 2014. Before automatically capitalizing for tax purposes costs to acquire, produce or improve property based on dollar amount, please consider the following:
• Does it Better (an improvement from when originally purchased, not now),
• Does it Adapt (alter for new use) or
• Does it Restore (example: deteriorated building was restored to a “like-new” condition.
If not a BAR, it is probably deductible for tax purposes as repair and maintenance. The final regulations also defined supplies and includes a de minimis election and building safe harbor.
–Helen Floros, Conner Ash
Check Your Charitable Deduction
My biggest piece of advice is regarding charitable giving. There is a big advantage to donating appreciated stock. This allows for a charitable deduction at the current fair market value of the stock, and there is no long-term capital gain recognized on the gift.
If you are the trustee or beneficiary of a trust, you need to discuss with your tax adviser and your attorney to manage income inside of the trust. The new 3.8% Net Investment Income Tax doesn’t hit individuals until $250,000 of income for married filing joint, but it does hit trusts starting at income of $12,150! There are of course nontax reasons for most trusts, but this is an issue that should be discussed and managed if possible.
–Scott Pinkowski, Purk & Associates
The trend towards “Dashboard” presentation of performance continues. A former colleague often said, “What gets measured gets done.” Dashboards help you measure regularly the most impactful items in a way easiest for you to digest. Dashboards should summarize information to allow quick assessment of profitability and important operating trends. Common items are: highly summarized comparative income statements, rolling 13-month line or bar graphs of monthly total revenue and total expense with the single most important component of each superimposed on each graph, pie charts of the most recent 12-month period’s revenue and expense components, and a group of key performance indicators (KPI) specific to how you manage the business. Examples of KPIs are head count, sales order backlogs, overall agings of accounts receivable and payable, throughput (e.g., number of diners for a restaurant), etc.
A highly underutilized QuickBooks feature makes producing reports much less tedious. After choosing formats customized for the owners’ needs, etc., those reports can be memorized. That way users get information in exactly the same way each time, making the information easier to use and of greater value. Plus, combining memorized reports into “groups” allows users to print all of the standard reports as if they were one report. Combined with QuickBooks’ unique ability to generate reports for all periods back to when it was first used, this helps users spot trends. For example, E&A regularly generates income statements and sales by customer reports in specific formats (both are by year) since startup. Each year is a column, and it’s great for understanding trends.
Review Your Vendors
To avoid a frantic January scramble for the tax information on vendors to issue 1099s in a timely fashion, begin reviewing your vendor list now to determine if it is complete and request the necessary W-9s from the vendors in November. That will give them time to reply and give you the opportunity to follow up at your leisure in December. This is a particularly common problem for organizations that use a lot of “independent contractors”
–Joe Eckelkamp, Eckelkamp and Associates
American Opportunity Tax Credit
With the cost of college continuing to increase each year, families are looking for opportunities to save or recoup some of that cost. One way to do this is via tax credits, one of which is the American Tax Opportunity Credit, which is available to taxpayers who pay for qualifying expenses for an eligible student. Eligible students include the taxpayer and his or her spouse and dependents. The maximum annual credit is $2,500 per student and is available for the first four years of postsecondary education. The student also must be an at least half-time student to qualify for this credit. This credit phases out for singles, heads of households, and some widows and widowers at $90,000 and for married filing joint at $160,000.
–Susan Taylor, Wamhoff Financial Planning & Accounting Services
Business Tax Planning
You are definitely in business to make money, but there are times when you do incur a loss and need to ensure you take advantage of it to lower your taxes. Below are some items you need to consider before the end of the year:
• Business bad debts
• Casualty and theft losses (including natural disaster losses)
• Capital losses
• Losses on the sale of business assets (including those that have been taken out of service or abandoned)
• Net operating losses (a net operating loss is generated when your business deductions for the year are more than your income). NOLs generally can be carried back two years. Unused NOLs may be carried forward as long as 20 years. Please contact your tax adviser to see whether any of these could be used for your business tax planning.
Business Tax Credits
Even though certain tax credits have expired, such as the Work Opportunity Tax Credit, there are still several tax credits available for business owners:
• Disabled access credit – 50% of eligible expenses over $250 up to $10,500 a year. The tax credit is available only for businesses with gross receipts of $1 million or less or fewer than 30 employees.
• FICA tip credit
• Small-employer pension startup credit
• Employer-provided child care credit
• Energy credits
• Small-employer health insurance credit – for 2014, eligible small businesses that purchase insurance coverage through a SHOP Marketplace may qualify for up to a 50% credit.
Review these credits with your tax adviser to see if you qualify.
–Sandy Furuya, Wamhoff Financial
Planning & Accounting Services
Health Care Credit
If you are a small business that employs fewer than 25 full-time-equivalent employees, you may be eligible for the Small Business Health Care Tax Credit. The maximum credit is equivalent to 50% of the health insurance premiums paid by employers on behalf of employees enrolled in a qualified health plan offered through the Small Business Health Options Program. Other eligibility requirements include average annual wages of less than $50,800 per full-time employee and the employer must cover at least 50% of the cost of employee-only health insurance premiums.
Health Care Penalty
Be sure to get health insurance if you do not already have it. The Affordable Care Act requires qualifying health insurance coverage in 2014 or you will owe an “individual shared responsibility payment.” Per the IRS.gov website, this penalty is the greater of 1% of your household income that is over the set threshold for your filing status or $95 per adult and $47.50 per child, up to $285 per return filed. The penalty would be due with your 2014 individual income tax return.
–Jon Becker, Becker and Rosen CPAs
Signs of Tax Filing Identity Fraud
Tax refund fraud is on the rise. You may be a victim of tax filing fraud if your tax preparer or the IRS contacts you about one of the following:
• More than one tax return for you was filed.
• You have a balance due, refund offset or have had collection actions taken against you for a year you did not file a tax return.
• IRS records indicate you received more wages than you actually earned.
• Your state or federal benefits were reduced or canceled because the agency received information reporting an income change.
Prevent Tax Filing Identity Fraud
Constant vigilance is the best method to avoid tax filing identity fraud this tax season. Here are some other steps you can take to ensure your identity’s safety:
• Don’t give personal information unwittingly.
• Check your credit report regularly.
• Open correspondence from the IRS.
• Purchase identity theft protection.
–Karen Stern, Small Business Services – Brown Smith Wallace
Failure to File FBAR – Big Mistake
What is FBAR? “FBAR” means Report of Foreign Bank and Financial Accounts. This is an annual report filed with the United States Treasury for Americans to report the existence of foreign bank accounts and other financial accounts held abroad. Do you know if you have FBAR filing requirements with the IRS? You must file if you have a financial interest in, signature authority or other authority over financial accounts in a foreign country and the aggregate value of these account(s) exceeds $10,000 at any time during the calendar year.
Why should this be an area of concern? The IRS may impose very stiff civil and criminal penalties for failing to file. Up to $500,000 penalty and imprisonment up to five years. What is the “Executive Summary” of this issue for a small-business person? International banking is a way of life for the small-business person today. The threshold (only $10,000) for reporting foreign accounts is very low, and the fines for noncompliance are high. Many small-business people may be blissfully unaware of the filing requirements.
Avoid Bitcoin Tax Traps
What exactly is bitcoin? It is a digital-only form of payment for products and services. The U.S. Treasury classifies bitcoin as a virtual currency. To buy bitcoins, you wire in traditional currency to a bitcoin exchange and receive bitcoins in return. Bitcoin allows for easy and inexpensive digital transactions. This fuels its popularity for e-commerce.
What are the IRS rules for bitcoin? Bitcoin is treated as property. Bitcoin users are to treat gains and losses upon the exchange of this virtual currency as a taxable event. Bitcoin users are to keep a strict record of every purchase made all year and then perform calculations to account for the changing value of a bitcoin. What about the state rules for bitcoin? The rules for bitcoin are the same as traditional currency. Sales tax must be collected and remitted on every transaction, when required. Profits are subject to state income taxes. Why should this be an area of concern? Rules and regulations on virtual currency, including Bitcoin, will continue to evolve. Be sure to follow developments closely to avoid penalties or audits. What is the “Executive Summary” of this issue for a small-business person? Virtual currency is here to stay. The allure of an uncomplicated and uncostly exchange system for the masses that is not plagued by traditional methods is strong. Small-business people will probably have to deal in virtual currency at some point to remain competitive. Small-business people need to stay informed to avoid a tax trap.
–John Kasperek, Kasperek & Co. Accountants
Follow the Charitable Rules
They say generous people are happier, but the IRS isn’t concerned with taxpayer happiness. The IRS is concerned with valid tax deductions. And to that, they have established some rules and criteria to apply to your generous act of giving to determine if it is deductible.
1) Taxpayers must itemize rather than take the standard deduction.
2) Cash or property must be given to a qualified charity – see www.irs.gov for a list.
3) No goods or services may be received in exchange for the donation.
4) The deduction is limited to the fair market value (price if sold on open market).
5) If property, it must be in good or better condition.
6) If the value is over $250, it must be validated by a written statement from the charity.
–Wendy Shireman, Bergman, Schraier & Co.
Protect Your Identity
Identity theft is a serious threat that affects people worldwide. If you have a bank account, use a credit card or simply use the Internet, you are at risk. With technology a constant in our everyday lives, the threat continues to rise.
Starting today, you can take a proactive approach to guard yourself against identity theft:
1) Invest in security programs for your computers and devices.
2) Review your credit report regularly.
3) Shred financial paperwork.
4) Never click on links from unfamiliar emails.
5) Keep importation documents in a secure location.
6) Consider investing in an identity theft protection plan.
–Alexandra Suhre, Bergman, Schraier & Co.
Social Security Benefits
Almost everyone wants to maximize their Social Security benefits by picking the right start date and term of monthly benefits. This requires making a few educated guesses. It also requires income tax planning to be done in conjunction with Social Security tax planning. For example, choosing to accelerate depreciation on a new piece of equipment may be best for income tax planning; however, it also may reduce your future Social Security benefits (thereby actually costing you money).
The Social Security Administration computes your monthly benefits by starting with your highest 40 quarters of Social Security tax paid in (accumulated over your working career). Lowering any of these amounts may result in a lower current income tax; however, that also may result in an unintended consequence of lower benefits to which you are entitled to over a number of future periods.
–Roger Toennies, Schmersahl Treloar & Co.
Are you trustee of a trust that paid higher taxes in 2013? The reason for that could be because of the new investment income tax on certain trust income. Trusts reach the top tax bracket a lot quicker than individuals. This top tax bracket for 2014 starts with adjusted gross income over $12,150, and undistributed investment income may be subject to the 3.8% net investment income surtax at that point. A trustee may be able to use some discretion in allocating indirect expenses to investment income to help reduce the amount of investment income subject to the surtax.
–Nathan G. Laurentius, Schmersahl Treloar & Co.
Time for a State Nexus Checkup
At the same time businesses are creatively thinking about how they do things, states are finding ways to change the rules of nexus. States are quickly making changes to their laws to implement an economic nexus standard. This may trigger nexus for out-of-state companies that conduct some level of economic activity within their borders. For example, Internet sales over specified thresholds to customers in some states will create nexus. The best policy is to stay on top of these changes and know where you have nexus. Prior-year liabilities can most often be resolved through voluntary disclosure agreements, which can be negotiated to limit the look-back period, interest and penalties.
Document Participation in Trade Activities
More than ever before, it is very important for business owners to document their level of participation in a business activity. This is especially true if you have investments in more than one trade or business. If your return is audited by the IRS, you may be asked to provide documentation to prove your participation. Proving material participation in a trade or business used to be important if the business was generating losses. Since 2013, it has also become important to prove material participation to escape the 3.8% Net Investment Income Tax (NIIT). In order to materially participate in each trade or business, you must meet one of the seven tests for material participation for each entity. The taxpayer carries the burden of proof and can establish participation by any reasonable means. Contemporaneous logs, journals, time sheets, appointment books and calendars may also be used.
–Paul Truber, UHY Advisors MO Inc.
Consider Selling Unrealized Losses
If individuals have capital gains and are in a tax bracket above 15%, consider selling capital assets with unrealized losses. If you are in the 15% bracket or lower, the tax rate for long-term capital gains is zero. In that situation, an individual should consider deferring those capital losses to future years. This will allow the individual to benefit from those losses, which would otherwise be wasted if taken in a year the individual was in a tax bracket of 15% or less.
–Mike Fitzgerald, Scheffel Boyle
Submitted 8 years 364 days ago