tax planning
Bathroom as home office?
Thursday, August 18th, 2011 | consulting, tax | No Comments
The Tax Court ruled that a taxpayer cannot claim his bathroom as a home office in Bulas v. Commissioner, T.C. Memo. 2011-201 (Aug. 17, 2011). (Insert your own joke or mental image here….)
The taxpayer had a home-based business, a tax practice for which he used one bedroom of his home as an office. He built a bathroom adjacent to the office for his clients to use. He argued that the bathroom and the hallway between the rooms should also be considered part of the home office, which would increase the deductible percentage of his home-related expenses.
According to the IRS, in order for a home office to be claimed on your tax return, it must be exclusively used on a regular basis
- (A) as the principal place of business for any trade or business of the taxpayer,
- (B) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business.
In this specific case, the taxpayer admitted to the court that his daughters and house guests sometimes used the bathroom. This occasional use by the family caused the bathroom to fail the “regular and exclusive use” test. The taxpayer might have successfully included the bathroom and hallway as part of the office if access by non-clients was limited, perhaps by a lockable door that separated the office “suite” from the rest of the house.
We can help you with creative and legitimate strategies for using your home office to save taxes. This deduction is subject to greater scrutiny from the IRS, so we can also help you maintain proof that your home office meets the requirements. With proper setup and records, the home office deduction can make a difference in your tax bill.
If you operate a company out of your home that is set up as an S-corporation, ask us about a plan that can secure the benefits of the home office deduction for your business.
Plan now to save taxes
Tuesday, August 9th, 2011 | consulting, tax | No Comments
Summer is a good time to talk with us about planning to save taxes next year. We have more time to help you take stock of the first half of the year and explore options before it’s too late in the year for them to make a difference.
Among those options:
- Consider equipment purchases, to take advantage of tax incentives that may expire soon.
- Improve facilities and depreciate them under accelerated schedules set to expire at the end of 2011.
- Take advantage of hiring incentives if you need extra help.
- Consider hiring your children and pay less employment taxes.
- Set up and contribute to a retirement plan, or consider whether your present plan is the optimum choice, to defer paying tax on income.
- Make sure your records support deductions for vehicle use, travel and entertainment.
- Look into net operating loss carrybacks to recover taxes paid in prior years.
- Adjust your estimated tax payments for the second half of the year.
Consult with us to gauge the tax impact of various options you are considering. And remember, don’t let the tail wag the dog. No one wants to pay more taxes than necessary, but first consider the questions, “Is this the best decision for my business? Will this help my company achieve its goals?”
Minimize capital gains tax
Thursday, March 31st, 2011 | consulting, tax | No Comments
When you sell an asset for more than your investment in it, the IRS says you must pay tax on the difference, called capital gain. For some years, the tax rate on such gains has been lower than regular rates if the asset is held for a long term (currently, more than one year). Hence the nickname, capital gains tax. The asset may be stocks, bonds, mutual funds, other assets such as equipment and real estate, or an entire company.
On the tax return, short-term and long-term capital gains and losses are accumulated in a specific manner to arrive at net short-term and long-term capital gain or loss from which the tax is calculated.
With good planning, there are several methods that you might use to minimize capital gains, and thereby minimize the tax you must pay on them. Here are six tips (with nods to Alan Haft, CPA Insider):
- When selling stock, specify which shares to sell. By choosing, you can decide the amount of gain or loss on the sale. This method can be used in conjunction with other sales to exercise some control over the net capital gain or loss amount reported on the tax return.
- Make all gains long-term. In 2010, short term capital gains are taxed at your ordinary income tax rate, which can be as high as 35% depending upon your income level. Long-term capital gains are taxed at a maximum of 15%, with additional breaks for lower-income taxpayers. So by holding onto your assets at least one year before selling, you take advantage of the lower tax rate on long-term gains.
- Use capital losses to offset capital gains. Short-term and long-term capital losses reduce their respective gains dollar-for-dollar. If you have more capital losses than gains, the net loss can reduce other income. This loss utilization is limited to $3,000 per year, but the excess loss can be carried forward to future years.
- Replace losing investments. If a stock or fund investment is depressed, you may sell it to lock in a tax loss. If you still believe it’s a good investment, wait 30 days before buying into it again to avoid the “wash-sale” rule. If you buy an identical stock within a period 30 days before or after the sale, the wash-sale rule prevents you from claiming a loss on the sale.
- Replace winners. The wash-sale rule does not apply when you sell an investment to lock in a gain. You may sell it and then buy it back immediately. You might do this if you have a loss to offset the gain, reducing the tax bill on the sale. When you buy the stock back at the higher price, you will pay less tax on future gains because your basis (the cost of the investment) is higher.
- Check mutual fund’s tax efficiency. If you invest in mutual funds, check a fund’s tax-efficiency ratio before investing. This is the percentage of total return you keep after taxes.
Another mutual fund idiosyncrasy is capital gains distributions. Funds may realize capital gains when they sell their underlying investments. During the financial meltdown, we saw large taxable capital gain distributions on 1099s even as mutual funds were losing value. Fund managers were forced to sell appreciated investments in order to redeem shares as investors pulled out of the funds. The resulting capital gains were distributed to all investors, who faced potential tax liability even though they remained fully invested and received no cash from the funds.
Tax impact is not the only criterion behind investment decisions, but it can play a part. By consulting with your CPA or an investment advisor familiar with tax implications, you can balance all factors to make the best decisions. Minimizing capital gains tax can be complicated, but with good planning, it can help you keep your money in your pocket and out of Uncle Sam’s.
Next IRS target - generous relatives
Wednesday, March 30th, 2011 | tax | No Comments
Generous relatives may be the next targets of IRS hunting expeditions. The IRS has asked a federal judge for a “John Doe” summons on the California Board of Equalization to force the board to turn over records of property transfers for little or no consideration. They are looking for people who have not paid gift tax on transfers of property to relatives between 2005 and 2010.
The Tax Code allows the transfer of up to $13,000 annually from one family member to another. Husband and wife can combine to give up to $26,000 a year. For each gift larger than that, the giver must file a Form 709 gift tax return. The giver, not the recipient, is liable for gift tax. Each taxpayer enjoys a lifetime gift tax exemption of a million dollars, making gifts up to that amount free of federal tax. But cumulative gifts over a lifetime must be accounted for in the estate tax calculation of the giver. If gift tax is owed but not paid by the giver, then the liability shifts to the recipient.
Property tax records and registered deeds are public records available for viewing by anyone. The IRS has been quietly gathering compliance information for some time, assisted by many states and counties who have voluntarily disclosed their property transfer data. The summons in California is one of the boldest attempts yet in the IRS effort to ferret out non-compliant taxpayers. Over the years, gift tax audits have been few and far between, but that could change as the IRS begins matching property transfer records with taxpayers.
If you are worried about the implications this may have for your family, please contact us. We can shed light on your situation and help keep the IRS gift tax target off of you.
Plan to maximize business tax incentives
Friday, March 18th, 2011 | consulting, tax | No Comments
Congress provided business tax incentives in 2010 in the Small Business Jobs Act and the Tax Relief Act. Strategically applying these business tax incentives together can be lucrative to businesses that are in a position to use them.
We’re busy this time of year preparing tax returns for our clients. But we’re not too busy to spend some time with them catching up on the year’s events and taking a look at the year ahead. That’s what separates us from the average accounting firm. Van and the staff are year-round resources to help our clients manage better and maximize the opportunities available to them. The new tax laws represent such an opportunity. Here are a few examples:
- If your corporation reports a loss and incurs research and development costs that generate a tax credit, the opportunity to carry this credit back five years may allow you to recover taxes paid in prior years.
- If the company had a net operating loss that is carried forward to 2010, the new law may allow you to reduce your tax bill by offsetting alternative minimum tax.
- A profitable company can use the depreciation incentives to defer taxes and positively impact cash flow in the current year, offsetting the impact of capital asset purchases that will help the company grow.
We’re still here after the tax return is done. We’ll listen and respond through all phases of your business to give you solutions designed to help you achieve your goals. If that’s the kind of pro-active approach you desire, call us to learn how we can help you.
Landlord? Get ready for 1099
Monday, February 7th, 2011 | tax | 1 Comment
If you have property that you rent to others, the IRS says you are engaged in a trade or business beginning January 1, 2011. This means you become subject to Form 1099 rules. If you pay an individual or company (not a corporation) more than $600 in the calendar year, you must report these payments to the payee and the IRS (usually on Form 1099-MISC, the same form you may be receiving for your rental income). These individuals include, for example, your repairman, plumber, landscaper, accountant, and attorney.
Considering this, it’s a good idea to collect the information you will need as each service provider does the work for you. The IRS created Form W-9 for this purpose, but you’re not required to use it. Just make sure you get at least their name, address, and Social Security number or Employer Identification number. This will save you the hassle of tracking them down next year before the January 31 deadline.
There are exceptions to the new rule:
- An active member of the uniformed services or an employee of the intelligence community who rents your principal residence on a temporary basis;
- An individual who receives rental income below a minimal amount (the IRS has not yet established this amount);
- Any other individual for whom the requirement would cause hardship (the IRS has not yet established what would constitute hardship).
We will keep you posted as regulations are developed to more fully define this new rule, which was part of the 2010 Small Business Jobs Act. You may have heard news about repealing the 1099 reporting provision contained in the health care reform act. We have word that although Congress is considering repealing those requirements, the law’s application to landlords is likely to stand.
There may be a legitimate way to avoid the 1099 reporting rule (besides not collecting rent). We’ll tell you more about that in a future post.
Estate tax in the 2010 Tax Relief Act
Friday, December 17th, 2010 | consulting, tax | No Comments
The speculation is over now that the tax relief bill is ready for the President’s signature. The bill is wide-ranging, covering income tax rates, extending many temporary provisions, adding a payroll tax cut, and modifying estate tax law, among other things.
Estate planning has been particularly difficult in the past few years. With the repeal of the estate tax and generation-skipping tax for 2010 has come a complex set of rules covering basis issues that arise with the repeal. Before 2010, estates were valued at fair market value on the date of death (or six months after in certain cases). The heirs assumed this value as their basis in calculating gain or loss on anysubsequent sale of estate assets. Repeal of the estate tax also meant repeal of this basis rule, which means that the heirs must find not only the date-of death value, but each estate asset’s original cost (carryover basis). Except for an exemption amount, the heirs must use the carryover basis in calculating gain or loss on any sale of estate assets, which can substantially increase the tax liability when the heir sells an asset that was bought by the decedent many years ago whose value has appreciated.
The Tax Relief Act has created a special election to allow the estate of a decedent in 2010 to use the rules under the repeal provisions. If the executor chooses not to make the special election, the retroactive provisions of the new law, which effectively extend the 2009 provisions, apply:
- The estate tax exemption and generation-skipping (GST) tax exemption is $5 million in 2010, 2011, and 2012, subject to an inflation adjustment in 2012.
- The top estate and gift tax rate is 35% in 2010, 2011, and 2012.
- For dates of death after 2010, any exclusion amount unused by the decedent may be carried over to be used by the surviving spouse’s estate. (The GST exclusion is not portable.)
- Extensions of time for filing are allowed for most 2010 estate and GST returns to nine months after this law is enacted.
- Estate and GST tax changes that had been scheduled to sunset after 2010 are now scheduled to sunset after 2012.
Other details apply to specific circumstances, so you should consult with your tax adviser to learn more. Even though the new act is only temporary, we now have guidelines for the next two years that will enable us to effectively plan ahead to protect family assets.
2011 standard mileage rates
Wednesday, December 8th, 2010 | tax | No Comments
The IRS has announced the standard mileage rates that will go into effect January 1, 2011:
- 51 cents per mile for business miles;
- 19 cents per mile for medical or moving expenses;
- 14 cents per mile in service of charitable organizations.
Health care tax credit starts this year
Monday, December 6th, 2010 | tax | No Comments
If your company or tax-exempt organization provides group health insurance coverage to your employees, it may be eligible for a tax credit on its 2010 return. The criteria for taxable entities:
- Employ fewer than 25 “full-time equivalent” employees (FTE, explained later);
- Pay average annual wages less than $50,000 per FTE;
- Maintain a “qualifying arrangement” for which the employer pays at least 50% of the premium cost.
The IRS has released Form 8941 to claim the credit. In the instructions to the form, they provide a worksheet to help you determine your eligibility for the credit, which phases out as the number of FTEs and average wages increase. The rules are slightly different for tax-exempt entities, but all employers use Form 8941 to claim the credit.
You should consult your tax advisor to ensure you don’t get tripped up by details in the law and regulations, but here are some highlights:
- Owners and their family members are not included in the calculations (check with your tax advisor for details).
- Full-time equivalent employees (FTEs) include part-time employees. Add every employee’s total hours, then divide by 2,080 (40 x 52 weeks), then round down to calculate the number of FTEs.
- Divide the total wages by the number of FTEs to calculate the average annual wages. All wages, including overtime and those for hours worked over the 2,080 full-time hours, must be taken into account.
- A self-insured plan, Health Reimbursement Arrangement (HRA), Health Flexible Spending Arrangement (FSA), or Health Savings Account (HSA) does not constitute a qualifying arrangement. The plan must be issued by a licensed insurer.
- Plans covering leased employees and multi-employer plans may be qualifying arrangements.
- Eligible premiums are only those paid for the employees, not their spouses or dependents.
The maximum credit is 35% of the qualifying premiums (25% for tax-exempt entities). It is reduced as the number of FTEs exceeds 10 and the average annual wages exceed $25,000.
Eligibility for the credit may affect your tax planning. Project your taxable income for the year to determine if there is an income tax liability that can be offset by the credit. Its value is lost to the extent that the tax bill is less than the credit.
This credit remains in place under current law until 2014, when health care reform takes full effect.
Take action now to reduce taxes
Tuesday, November 23rd, 2010 | consulting, tax | No Comments
Year-end is the best time to take actions that have an impact on next spring’s tax bill. There’s not much you can do after the year is over. Take time to do financial projections through year-end and calculate your tax bill. Working with your accountant, you can identify actions to take that may reduce your tax or improve your financial position.
Although we are still waiting for Congress to act on several important tax issues, laws were passed earlier this year that change the calculations for many business owners. You still have time to arrange things to take advantage of these new provisions.
The Affordable Care Act introduced a tax credit that takes effect this year for smaller employers who pay at least part of their workers’ health insurance premiums. After determining whether your company is eligible and the amount of the credit, you can calculate how much net income (and taxes) will be offset by the credit.
The HIRE Act offers a payroll tax reduction for hiring new workers, starting with the second quarter of 2010. If you have not been taking advantage of this reduction, amend the prior returns and reduce the amount of your deposits in this final quarter for a holiday cash windfall. Beware, though, that the reduction may also reduce your payroll tax expense deduction and increase your income tax bill. If you keep those new hires on the payroll for a year, you get an income tax credit in 2011.
The Small Business Jobs Act, enacted in September, contains about a dozen and a half provisions that may affect your business’s tax situation this year and next. They include:
- Several adjustments to depreciation deduction limits for first-year write-offs and bonus depreciation for various types of property and vehicles.
- An increase in the up-front deduction for business start-up expenses if the business starts operation in 2010 only.
- An option to carry back business credits five years and recover taxes previously paid.
- Relaxation of the record-keeping rules for deducting cell phones. (Did you know you had to log every business call?)
- A reduction in self-employment tax for self-employed persons who buy health insurance for themselves and their families.
These provisions may affect you starting in 2011:
- Many rental income recipients must begin issuing Forms 1099 to service providers (e.g., plumbers, painters, etc.) to whom they pay $600 or more. (Some exceptions apply.)
- Penalties for failure to file information returns such as Forms 1099 have been increased substantially.
If you work through the projections and consult with your tax professional before year-end, you can make decisions that may save your company taxes and improve your financial position.