tax preparation
Net operating loss carryback deadlines loom
Thursday, July 15th, 2010 | tax | No Comments
If your business suffered a net operating loss (NOL) in 2008 or 2009 (or a 2007 fiscal year), you may elect to carry back that loss up to 5 years and recover taxes previously paid. You must make the election on a timely filed return, including extensions. The deadline for electing the extended net operating loss carryback is September 15, 2010 for calendar-year corporations. It is October 15, 2010 for individuals. If you do not elect to apply the extended carryback, the original two-year carryback rule applies. In either case, any unused loss may be carried forward up to 20 years. Complicated enough yet? It gets worse - and better.
Here’s the better part: The original extended NOL carryback provision, part of the American Reinvestment and Recovery Act (ARRA) of 2009, applied only to an ‘eligible small business’ (under $15 million average gross receipts). The Worker, Home Ownership, and Business Assistance Act (WHOBA) of 2009 allows taxpayers of any size to make the election.
The other better part: The extended carryback election is generally available for only one of the tax years ending after 2007 and beginning before 2010. However, if you already made a timely election under the provisions of the ARRA, you may make an additional election for another year’s NOL under WHOBA. Even if you have already timely filed your 2009 return, you may be able to make the election before the extended deadlines.
The worse part: These rules are extremely complicated, so you need the help of a professional who is familiar with them.
By applying a net operating loss to profitable tax years, you can give your company a cash stimulus through a refund of previously paid taxes.
Congress helps homebuyers
Friday, July 2nd, 2010 | tax | No Comments
Homebuyers who were unable to close before July 1 have been granted a reprieve to claim the homebuyer credit. If the contract on their house was signed before May 1, they now have until September 30 to close on the purchase.
The homebuyer credit in its present form (it’s been amended three times now) is a tax credit of 10% of the home’s purchase price, up to a limit of $8,000. It is available to buyers who have not owned a principal residence in the last three years. A similar credit, limited to $6,500, is available to “long-time residents” who have lived in their old house for 5 consecutive years in the last eight before buying their new house.
In order to claim the credit, the buyers must have bought the house or signed a binding contract before May 1, 2010. The deadline to close the deal was June 30, but many buyers could not meet the deadline because of backlogs at lenders and federal agencies, construction delays, and difficulties working out terms of short sales. The extension of the closing deadline allows three more months to settle and close those deals, but it does not change the April 30 deadline for signing contracts.
There are limits and prcoedural rules to claiming the homebuyer credit. It is reduced or eliminated as income rises, and it cannot be claimed for homes whose purchase price exceeds $800,000. Dependents and purchasers under 18 cannot claim the credit, and it is not available if the house was purchased from certain relatives. Proper documentation must accompany Form 5405. Consult your tax advisor (our number is 865-523-8700) to make sure you follow all the rules to get your credit.
Tax code as cash flow tool
Thursday, July 1st, 2010 | consulting, tax | No Comments
Has your business suffered a net loss during the recession? A tax refund may give you a needed cash infusion. The federal tax code provides a means to smooth out the business cycle. If your company reports a net operating loss on this year’s tax return, you can recover tax paid in prior (or future) years when the company reported a net profit.
The technique is called a net operating loss carryback. You must elect to carry a loss back on a timely filed return, otherwise the loss may be carried forward to as many as twenty future tax years to reduce taxable income. Normally, the loss may be carried back two years. For either 2008 or 2009 (not both), a loss may be carried back up to five years. If the loss is not used up in the prior years, it may be carried forward.
The IRS provides a method to quickly recover taxes to be refunded because of the loss carryback. By properly filing an Application for Tentative Refund (Form 1139 for corporations, Form 1045 for individuals, estates, and trusts), you can recieve a refund within ninety days of filing. This can provide a relatively quick cash infusion to help pull your company through the rough patch.
If a coroporation expects a loss this year and has not yet filed its return for last year, it can apply on Form 1138 for an extension to pay last year’s tax. When the net loss for this year is calculated, the company will pay last year’s tax (plus interest) after applying the net operating loss.
A corporation that has paid more estimated tax than necessary in light of adjusted income or loss projactions may apply for a quick refund of those payments on Form 4466.
These techniques can return cash to the company for daily operations rather than tying it up until after the year’s tax return is filed. Other types of carrybacks are also available, such as casualty and theft loss, farming loss, foreign tax credit, and loss attributable to a federally declared disaster.
As usual, there are technical details and caveats to the use of these techniques. Some of these details are discussed in this article. You should consult your tax advisor to determine the most appropriate action for your situation. We will be happy to help you with these tools, and to find other ways to improve your cash flow.
Renting to relatives
Monday, June 28th, 2010 | consulting, tax | No Comments
Renting property to your relatives can be a good thing. You know them, and you probably have a good idea of how they will take care of the property. You may consider renting to your retired parents or to your children attending college. You must play by IRS rules to retain the tax advantages of renting out property. If you don’t, the deductions will be disallowed while the income is taxed - a double tax hit. You may also suffer unfavorable tax consequences when you sell the property.
Special rules apply to rental of a residence (rental house or apartment) and to vacation home rental.
You must charge a fair rent to your relative on a residence to avoid having that property reclassified as a second home (and losing rental deductions).
- Prove fair rent by collecting third-party documentation about rents for similar properties in the area from the want ads and craigslist. Letters from property managers and independent appraisals are good evidence to support fair rent.
- Do not make gifts to help your tenant pay the rent. The gift will be deemed to reduce the rent, putting it below fair value and jeopardizing the rental claim.
- One alternative for your relative who needs rent money is gifting business assets and having your company lease them back so that your tenant receives rental income. Another option is to hire your relative, although that generates payroll taxes.
- You may consider a good-tenant discount of no more than 10%. One justification for this discount is that there is no need for a rental management company, passing the savings to the tenant.
- If you wish to set up a rent-to-own situation, you must follow the rules for a shared-equity financing agreement for the rental to stand.
- Your relative must use the rental property as a principal residence.
If you have a vacation home that you rent for part of the year and also use personally, the tax code provides a break on rental income. Your personal use of the vacation home must not exceed the greater of 14 days or 10% of rental days per year. If your relatives use the vacation home, their use counts toward these limits even if you charge fair rent. If your combined use exceeds these limits, the property becomes a second home, which makes the rent income taxable while eliminating the usual rent expense deductions.
If you are considering renting to relatives, a call to us will help ensure that everything is done in a way that secures the greatest tax advantages and best financial outcome for your family.
The Software Botched My Return
Friday, May 7th, 2010 | tax | No Comments
Sorry, this excuse does not cut it with the IRS. This Tax Court case punched a big-ole hole in the so-called Tim Geithner defense that a software error caused the tax understatement. This lady tried to do her taxes with TurboTax, but reported various transactions on the wrong forms and reported a rental loss on the house her father lived in rent-free. The software calculated everything correctly according to the information she input, but it could not tell whether she was putting the numbers in the right places. They make it look so easy and foolproof on those TV ads, don’t they?
Some tax surprises
Monday, March 22nd, 2010 | tax | No Comments
Through this tax season, a few of our clients have faced an unwelcome surprise - an unexpected tax bill. Although the reasons vary for each client, the land mines are sometimes built into the regulations. Some examples:
The tables and formulas that determine the amount withheld from your paycheck for income taxes are set up for a family with one wage-earner. If both husband and wife work and declare too many withholding allowances on your W-4 forms, too little may be withheld. This can be an especially annoying problem if incomes fluctuate from year to year. One of our clients saw a $3600 reduction in withholding when the wife’s income fell and the husband’s icnome rose, even though the total household income fell only $4000. Now they are looking at a tax bill instead of a refund when they file their return.
A new tax credit for 2009 is causing unexpected tax bills for some. The Making Work Pay credit can reduce your tax bill by up to $400 ($800 on a joint return). The IRS was nice enought to give it to you a little bit at a time by reducing the amount withheld from each paycheck since April 2009 - did you notice? As a result, some of you who had just enough withheld to cover your taxes in 2008 have not had enough withheld in 2009, and you must pony up the difference by April 15. That’s not the outcome you expected from your good planning.
For some other surprises, take a look at this slideshow at bankrate.com. By the way, this website is an excellent resource for a wide variety of financial information.
Oddball Deductions
Monday, March 1st, 2010 | tax | No Comments
Sometimes it pays to think outside the box about deductible expenses, as reported in this post on Kiplinger.com. These taxpayers probably had to fight the IRS to keep their deductions, but the payoff apparently was worth the cost of engaging effective representation.
Which brings up an important point - for your protection, you should never deal with the IRS without representation by someone who knows how to respond to their tactics. I have a horror story to tell you in another post.
1099 Traps
Monday, March 1st, 2010 | tax | No Comments
The IRS computer-matches Forms 1099 with your tax return, so it’s important that you gather 1099’s from all sources and report them on your return even if they contain errors. There are ways to correct errors, but if the computers cannot match the numbers in the first place, they will automatically generate tax-due notices that are time-consuming to clear up. Read more in this article from Forbes magazine.
Claim Your Deductions
Friday, February 19th, 2010 | tax | No Comments
As you reminisce about the past year while gathering your tax info, you might find some transactions that can reduce your tax bill. Many tax laws have changed in the past few years. We try to help you through the Taxpayer Organizers that we send out, and you are welcome to call us with any questions.
Take a look at these articles listing some deductions you might not have been aware of:
Haiti relief donations are deductible on 2009 returns
Monday, February 1st, 2010 | tax | No Comments
If you donate to a qualified charity for the relief effort after the earthquake in Haiti, you have a new choice thanks to Congress and President Obama. You may deduct the contribution on your 2009 tax return (that you will file this year), or you may wait until next year. The announcement (summarized here) also provides a way to substantiate your deduction if you donated via text message - very convenient.