Any employer reimbursing its employees for business-related expenses should consider whether the reimbursement arrangement meets the IRS’s requirements for an accountable plan. Having an accountable plan that meets tax law requirements can provide tax advantages.
Each expense reimbursed under an accountable plan must have a business connection. This means that the expense must be allowable as a deduction and paid or incurred by the employee while performing services as an employee.
Employees must adequately account for their expenses and return any excess reimbursements or allowances within a reasonable period of time. The meaning of reasonable period of time depends on the facts and circumstances, but the IRS has provided several safe harbors.
Substantiation of an expense within 60 days after it is paid or incurred will be deemed reasonable, as will the return of an advance within 120 days. Alternatively, an employer may provide its employees with periodic statements (at least quarterly) that require them to either account for or return any advances within 120 days of the statement.
Expense reimbursements made under an accountable plan that meets the requirements are not included in an employee’s wages and are not subject to federal income or employment taxes. This can be a tax saver for both the employer and the employee.
If no accountable plan is in place, amounts paid to the employee count as taxable wages. In the past, the employee could potentially deduct the expenses, but only if the employee itemizes deductions rather than claims the standard deduction. Under the new tax law, this deduction is no longer available–so the employee will include the reimbursement in income, but would not be entitled to a deduction.
Your small business does many things. It supports the community by providing goods and services. It supports the local government by paying taxes and fees. And it supports your employees by providing their livelihoods.
Your business provides for you, too. But don’t count on this to continue. You need a plan for using your business to create personal wealth.
Fund a Retirement Plan
Contributing to a retirement plan is generally a great way to convert money from your business into a personal benefit. Over time, you may be able to accumulate a substantial amount, especially if you contribute the maximum amount. If you don’t have a retirement plan, your financial professional can give you information about the options best suited for small businesses.
Fund Your Exit Strategy
A potentially more lucrative way to convert business wealth into personal wealth is to sell your company. This is a big step and it could take longer than you think, so allow plenty of time. Make sure you have a business valuation done early in the process. That way, if the value isn’t as high as you want (need) it to be, you have time to make necessary changes.
If you don’t have a formal succession plan, create one. If you do have one, make sure it’s kept up to date. A succession plan shows potential buyers that you are committed to having the business survive without you. A buy-sell agreement is a popular way to provide for the transfer of a business. Such agreements are legal contracts that establish who can buy an interest in a company and under what conditions they may do so.
Fund Your Buy-Sell Agreement
Life insurance is a popular way to fund buy-sell agreements. If you’d like to learn more about the role insurance can play in your — and your company’s — future, call your financial professional. Don’t have one? We have recommendations.
The Tax Cuts and Jobs Act (TCJA) has made changes to the tax treatment of alimony that you will be interested in. These changes take effect for divorces and legal separations after 2018.
Current rules. Under the current rules, an individual who pays alimony may deduct an amount equal to the alimony or separate maintenance payments paid during the year as an “above-the-line” deduction. (An “above-the-line” deduction, i.e., a deduction that a taxpayer need not itemize deductions to claim, is more valuable for the taxpayer than an itemized deduction.)
And, under current rules, alimony and separate maintenance payments are taxable to the recipient spouse (includible in that spouse’s gross income).
Please note that the tax rules for child support—i.e., that payers of child support don’t get a deduction, and recipients of child support don’t have to pay tax on those amounts—is unchanged.
TCJA rules. Under the TCJA rules, there is no deduction for alimony for the payer. Furthermore, alimony is not gross income to the recipient. So for divorces and legal separations that are executed (i.e., that come into legal existence due to a court order) after 2018, the alimony-paying spouse won’t be able to deduct the payments, and the alimony-receiving spouse doesn’t include them in gross income or pay federal income tax on them.
TCJA rules don’t apply to existing divorces and separations. It’s important to emphasize that the current rules continue to apply to already-existing divorces and separations, as well as divorces and separations that are executed before 2019.
Some taxpayers may want the TCJA rules to apply to their existing divorce or separation. Under a special rule, if taxpayers have an existing (pre-2019) divorce or separation decree, and they have that agreement legally modified, then the new rules don’t apply to that modified decree, unless the modification expressly provides that the TCJA rules are to apply. There may be situations where applying the TCJA rules voluntarily is beneficial for the taxpayers, such as a change in the income levels of the alimony payer or the alimony recipient.
If you wish to discuss the impact of these rules on your particular situation, please give me a call.
I am writing to let you know about changes that the Tax Cuts and Jobs Act (TCJA) made in the rules for deducting home mortgage interest.
Deductibility of interest on “acquisition debt.” Taxpayers may deduct interest on mortgage debt that is “acquisition debt.” Acquisition debt means debt that is: (1) secured by the taxpayer’s principal home and/or a second home, and (2) incurred in acquiring, constructing, or substantially improving the home. This rule isn’t changed by the TCJA.
Pre-TCJA maximum for acquisition debt. Under the pre-TCJA rules, the maximum amount that was treated as acquisition debt for the purpose of deducting interest was $1 million ($500,000 for marrieds filing separately). This meant that a taxpayer could deduct interest on no more than $1 million of acquisition debt.
Pre-TCJA deduction for “home equity” debt; maximum. Under pre-TCJA rules, taxpayers could also deduct interest on “home equity debt.” “Home equity debt,” as specially defined for purposes of the mortgage interest deduction, meant debt that: (1) was secured by the taxpayer’s home, and (2) wasn’t “acquisition indebtedness” (that is, wasn’t incurred to acquire, construct, or substantially improve the home). Thus, the rule allowing deduction of interest on home equity debt enabled taxpayers to deduct interest on debt that was not incurred to acquire, construct, or substantially improve a home—on debt that could be used for any purpose. As with acquisition debt, pre-TCJA rules limited the maximum amount of “home equity debt” on which interest could be deducted to the lesser of $100,000 ($50,000 for a married taxpayer filing separately), or the taxpayer’s equity in the home.
TCJA decreases maximum acquisition debt. Under the TCJA, starting in 2018, the limit on acquisition debt is reduced to $750,000 ($375,000 for a married taxpayer filing separately). The $1 million, pre-TCJA limit applies to acquisition debt incurred before Dec. 15, 2017, and to debt arising from refinancing pre-Dec. 15, 2017 acquisition debt, to the extent the debt resulting from the refinancing does not exceed the original debt amount. Thus, taxpayers can refinance up to $1 million of pre-Dec. 15, 2017 acquisition debt, and that refinanced debt amount won’t be subject to the reduced limitation.
TCJA eliminates deduction for “home equity” debt. Also, starting in 2018, there is no longer a deduction for interest on “home equity debt.” The elimination of the deduction for interest on home equity debt applies regardless of when the home equity debt was incurred.
Taking the TCJA changes into account. Taxpayers considering taking out a home equity loan—i.e., a loan that’s not incurred to acquire, construct, or substantially improve the home—should take into consideration the fact that interest on the loan won’t be deductible. Further, taxpayers with outstanding home equity debt—again, meaning debt that’s not incurred to acquire, construct, or substantially improve the home—will lose the prior-law interest deduction for interest on that debt, starting in 2018. (Interest on home equity debt is deductible for the 2017 tax year, the return for which is filed in early 2018.)
TCJA changes will last through 2025. Finally, it’s important to note that both of these changes—the lowered maximum for acquisition debt, and the elimination of the deduction for home equity debt—last for eight years, through 2025. In the absence of intervening legislation, the pre-TCJA rules will come back into effect in 2026. So beginning in 2026, interest on “home equity” loans will be deductible again, and the limit on qualifying acquisition debt will be raised back to $1 million ($500,000 for married separate filers).
If you would like to discuss how these changes affect your particular situation, and any planning moves you should consider in light of them, please give me a call.
For years, owners of rental properties that show a tax loss have had to contend with the tax law’s “passive loss” limitations. With limited exceptions, real estate rental losses may be used only to reduce passive income — the rental losses are not currently deductible against nonpassive income, such as salary.
Now, owners of real estate rental properties that show a profit also face a potential tax headache. In addition to regular taxes, their profits could be subject to the 3.8% surtax on net investment income first introduced in 2013.
A Break for Real Estate Professionals
Taxpayers who can demonstrate that they “materially participate” in their real estate rental activities as “real estate professionals” may be able to avoid both the passive loss limitations and the 3.8% surtax on rental income. However, the requirements are stringent.
Very generally, a real estate professional spends more hours working on real-estate- related trade or business activities during the year than working in non-real-estate trades or businesses. Additionally, the time spent on the real estate activities must total more than 750 hours during the year.
Material participation means regular, continuous, and substantial participation. IRS regulations contain seven tests for establishing material participation. Each rental property is separately evaluated for material participation unless the taxpayer makes an election to treat all rental real estate activities as one activity.
To avoid the 3.8% surtax, a real estate professional must also establish that his or her rental income was derived in the ordinary course of a trade or business. The IRS will presume this was the case if the taxpayer devotes more than 500 hours per year — or in five of the last ten years — to each real estate rental activity or to all real estate rental activities viewed as a group.
Give us a call today, so we can help you determine the right course of action for you.
The tax deduction available for making a charitable donation of property may be no more than the fair market value of the property on the date of the gift. Fair market value is the price that a willing buyer and seller would agree to when neither is required to act and both have reasonable knowledge of the relevant facts.
The IRS lists several factors that may be considered in determining fair market value.*
Cost or selling price can be an accurate measure of fair market value when the transaction and the donation dates are close and there has been no change that would affect the item’s value.
Sales of comparable properties may be useful for determining value where the properties sold and the property donated are similar and the sales occurred reasonably close in time to the date of the donation.
Replacement cost may be a good indicator of value in some situations, provided that depreciation is subtracted from the cost to reflect the property’s physical condition and obsolescence.
Expert opinion is relevant to the extent the expert has the appropriate education and experience and has thoroughly analyzed the transaction.
* IRS Publication 561, Determining the Value of Donated Property
Who Qualifies as an Appraiser?
Generally, where a charitable deduction of more than $5,000 is claimed for donated property, the IRS requires a qualified appraisal by a qualified appraiser. A qualified appraiser is someone who:
- Has earned an appraisal designation from a recognized professional organization or has met certain education and experience requirements
- Regularly prepares appraisals for a fee
- Is not an “excluded individual,” such as the donor, the donee, or a party to the transaction in which the donor acquired the property being appraised (Other exclusions apply.)
The qualified appraisal must be signed and dated and can be made no earlier than 60 days before the valued property is donated.
To learn more about tax rules and regulations for donations, give us a call today. Our knowledgeable and trained staff is here to help.
Everyone makes mistakes, but making a mistake on your income-tax return can cost you. It could delay your refund, boost your tax bill, require an amended return or even trigger an audit. Before you submit your return electronically or put it in the mail, double-check to make sure you haven’t made any errors.
Simple slip ups
Many tax-return mistakes are simple ones. Ensure that you’ve entered the correct name, address and Social Security number for every person listed on your return. Another frequent error is to enter the right information on the wrong line. So it pays to go through your return line by line.
Clear up confusion
It’s important that you use the right filing status. If you’re not sure which filing status is right for you, use the interactive tool “What is My Filing Status?” on www.irs.gov. You can also check the IRS website to figure out who you can claim as a dependent. Once you determine who qualifies as your dependent(s), verify that you have checked the appropriate exemption boxes for your personal, spousal and dependency exemptions.
Correctly calculate credits and deductions
If you’re claiming any credits, such as the dependent care credit, you need to follow the instructions carefully. And check that you have completed the necessary forms or schedules. If you’re taking the standard deduction, verify that you are claiming the correct one. You can use the chart in the Form 1040 Instructions or use the interactive tool “How Much is My Standard Deduction?” on www.irs.gov.
Check your math
It’s very easy and common to make simple math errors while preparing your tax return. It’s a good idea to double-check that you’ve added and subtracted all numbers correctly and that you haven’t transposed any numbers. Ensure that you used the right column on the tax table when figuring out your tax.
Final details matter
Don’t be in such a rush to finish your return that you forget a few final, simple steps. If you’re filing a paper return, verify that you (and your spouse if it’s a joint return) have signed and dated the return. Attach Copy B of each Form W-2 that you received from your employers. Attach each Form 1099-R that shows federal tax withholding. And attach all other necessary schedules and forms in sequence number order. Make a copy of the return and all attachments for your own records. Use the correct mailing address from your tax form instructions, and include a check or money order if you owe tax. And, finally, check that you put sufficient postage on your envelope.
Connect with our team today for all the latest and most current tax rules and regulations.
Any deductible expense is useful because it reduces the amount of income subject to tax. But for individual taxpayers, deductions that can be claimed in arriving at adjusted gross income (AGI) — referred to as “above-the-line” deductions — are especially significant. By lowering AGI, above-the-line deductions increase your chances of qualifying for various other deductions and credits.
Alimony. Generally, payments are deductible if they were made in cash pursuant to a divorce or separation instrument. Other requirements may apply. As part of the Tax Cuts & Jobs Act, the taxation of alimony will change for divorce or separation agreements entered into after 2018. For these agreements, alimony will no longer be deductible by the payer and will be tax-free to the recipient.
Traditional IRA contributions. Contributions of up to $5,500 ($6,500 for individuals age 50 or older) to a traditional individual retirement account (IRA) are potentially deductible on your 2017 return. AGI-based limitations apply if you (or your spouse) are an active participant in an employer-sponsored retirement plan.
Rental property/trade or business expenses. Expenses associated with property held for the production of rents are deductible above the line on Schedule E, whereas sole proprietors deduct their trade or business expenses above the line on Schedule C.
Student loan interest. Taxpayers may deduct up to $2,500 of interest expense on qualified higher education loans, though phaseouts apply to those at higher levels of modified AGI.
Moving expenses. Subject to certain requirements, a taxpayer who moves as a result of a change in his or her principal place of work may deduct certain costs of moving and traveling to the new residence. 2017 is the last year this deduction will be allowed–it was eliminated as part of the Tax Cuts & Jobs Act.
Health savings account contributions. The 2017 deduction limits are $3,400 for those with self-only coverage under an eligible high-deductible health plan and $6,750 for those with family coverage. An additional $1,000 deduction is available to those 55 and older who are not enrolled in Medicare.
Self-employed taxpayers. The self-employed also may be able to deduct retirement plan contributions, qualified health insurance premiums, and a portion of their self-employment taxes.
For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.
Most small business owners love what they do. But that’s not to say things can’t get a little difficult, especially when customers don’t pay their bills on time. Even one or two slow-pay or no-pay customers can be enough to throw your company’s finances off.
Understanding what might be going on with your customers and being proactive can help you keep your accounts receivable on steady ground.
Purchase Order Predicaments
Not all customers use purchase orders, but those that do rely on them to coordinate ordering and accounts payable functions. If there’s a mix-up involving a purchase order and your invoice doesn’t match up with the customer’s purchase order, your invoice could end up on the “problem” pile instead of the “pay” pile. Be proactive by verifying that the purchase order numbers on your invoices are correct before they are sent.
Strapped for Cash
Lack of money is a common excuse for not paying. One reason your customer may not be able to pay you is because your customer’s customers haven’t paid their bills. Regardless of the reason, be the squeaky wheel and keep communicating with your past due customers.
You can help reduce your exposure to customer cash shortfalls by tightening your credit requirements.
Disputes, Dilemmas, and Other Disappointments
Misships, damaged goods, late deliveries. Plenty of things can go wrong during the fulfillment process. Rather than make a phone call, customers may just “file” your invoice at the bottom of the pile.
Follow-up e-mails or phone calls to find out if your customers are satisfied will help smooth any ruffled feathers and could improve how quickly you get paid.
“We never received your invoice” is a weak excuse, but you still have to find a way around it. Once again, early follow-up is key. Paperless billing and the potential to monitor whether e-mailed invoices have been opened can also help eradicate this excuse.
Don’t get left behind. Contact us today to discover how we can help you keep your business on the right track. Don’t wait, give us a call today.
Is your activity a business or a hobby? It’s important to know because if the IRS views your activity as a hobby rather than as a business, your tax deductions for business-type expenses are subject to certain limitations.
Business Versus Hobby
To qualify as a business, an activity must be conducted for the primary purpose of making a profit. Factors that are considered in determining whether you have a profit-making objective include:
- How the activity is conducted
- Your expertise and that of any advisors
- The time and effort put into the activity
- Whether you expect that assets used in the activity will appreciate in value
- Your success in other similar or dissimilar activities
- Your history of income/loss with respect to the activity
- The amount of any profit
- Your financial status
- The presence of personal pleasure or recreation
Generally, the IRS presumes that an activity qualifies as a business if it shows a profit for three out of the last five years.
If your activity is considered a hobby, two rules limit the amount of expenses you can deduct. First, your deduction for hobby expenses (such as rent and advertising) cannot exceed the activity’s gross income. So if your hobby income is $5,000 but your expenses are $6,000, you may take only $5,000 in expenses. You may not use the additional $1,000 to offset other income.
Second, hobby expenses are deductible only to the extent they (when combined with other miscellaneous expenses) exceed 2% of your adjusted gross income (AGI). So in the example above, if your AGI was $100,000, you would be able to deduct only $3,000 of the $5,000 in expenses.
Running your activity in a businesslike way can help you avoid the hobby-loss restrictions. Connect with our team today for all the latest and most current tax rules and regulations.