Monthly Archives: November 2015

IRS Makes it Easier to Immediately Deduct “Small” Asset Purchases

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small property safe harborIn September 2013, the IRS released 200 pages of guidance to business owners on when they should immediately deduct repair expenses or depreciate the repair expenses over several years. This guidance also addressed when business owners can immediately deduct asset purchases or when they should capitalize the asset purchase and deduct it over a number of years through depreciation.

Fortunately, the IRS has a de minimis safe harbor election that allows business owners to immediately deduct amounts paid for property if the business owner meets certain requirements.

This safe harbor was intended as an administrative convenience whereby a business owner can deduct small dollar expenditures for the purchase of new property or for the improvement of existing property. If the business owner spends an amount greater than the safe harbor amount, the safe harbor does not bar the business owner from immediately deducting the expense, but the business owner must establish that the expense qualifies as an item that can be expensed immediately.

How to Meet the Safe Harbor

To meet the safe harbor, the taxpayer:
• must have, at the beginning of the tax year, written accounting procedures treating as an expense for non-tax purposes amounts paid for property (1) costing less than $2,500 (per invoice or per item); or (2) with an economic useful life of 12 months or less
• treats the amount in its books and records as an expense

The original threshold limit was $500 per item or invoice. The IRS received a substantial number of comments noting that the cost of many commonly expensed items (for example, tablet-style computers, smart phones, and machinery and equipment parts) typically exceed the prior $500 per item or invoice threshold.

Example: ABC Corp has accounting procedures at the beginning of the year to expense amounts paid for property costing $2,500 or less and to expense amounts paid for property with an economic useful life of 12 months or less.

During the year, ABC buys 10 hand-held point-of-service devices at $600 each (total cost $6,000). Prior to the increase in the safe harbor threshold amount, ABC would have to capitalize the $6,000 purchase price and depreciate the expense over 5 years because each item cost more than the prior $500 safe harbor threshold.

Since the threshold has just been increased to $2,500 per item or invoice, ABC can now fully deduct the $6,000 purchase price of the items because the expense was less than $2,500 per item.

When Does the Safe Harbor Take Effect?

This increase is effective for costs incurred during tax years beginning 2016, but use of the new threshold won’t be challenged in tax years prior to 2016. And, if a taxpayer’s use of the de minimis safe harbor is an issue under consideration in examination, appeals, or before the U.S. Tax Court in a tax year beginning after Dec. 31, 2011 and ending before Jan. 1, 2016, and the issue relates to the qualification under the safe harbor of an amount that doesn’t exceed $2,500 per invoice (or item, as substantiated by invoice) and the taxpayer otherwise satisfies the applicable requirements, IRS won’t pursue the issue further.

To see how this applies to you, give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Does Your Business Qualify for the U.S. Producer Deduction?

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U.S. Production DeductionOver the years, Congress has attempted to help the domestic manufacturing industry compete against foreign manufacturers. In doing so, Congress enacted export subsidies that ended up violating World Trade Organization rules.

Congress responded by enacting the U.S. Producer Deduction which is a deduction equal to 9% of qualified production activity income, subject to certain limits. While originally targeting manufacturing and production activities within the U.S., this deduction incorporates a broad definition of the term manufacturing. It will also help construction companies, software development companies, engineers and architects, and film producers.

What are Qualified Production Activities?

The following activities are qualified production activities:

• The manufacture, production, growth, or extraction in the U.S. of tangible personal property, computer software, or sound recordings.
• The construction or substantial renovation of real property in the U.S. by a taxpayer engaged in the construction business, including residential and commercial buildings and infrastructure such as roads, power lines, water systems, and communications facilities
• Engineering and architectural services performed in the U.S. by a taxpayer engaged in the business of performing engineering services, and relating to the construction of real property
• Film production if at least 50% of the total compensation relating to the production of the film is for specified production services performed in the U.S.
• The production of electricity, natural gas, and potable water in the U.S.

How is the Deduction Calculated?

The deduction is equal to 9% of the lesser of the taxpayer’s qualified production activity income or the taxpayer’s taxable income for the year. The deduction is also limited to 50% of the taxpayer’s Form W-2 wages for the year that are allocated to domestic production gross income. The reason for the W-2 limitation is that Congress wants businesses to hire workers as employees rather then use independent contractors.

Businesses must allocate their revenues and expenses between qualifying production activities and other activities. The deduction is based only on qualifying production activity income.

Example: ABC Engineering has $300,000 in revenues from its commercial building services department. It also has $200,000 in revenues from automobile design services. Its only expenses are $100,000 in salary to its commercial building engineer and $75,000 to its auto engineer. The qualified production income is $200,000 ($300,000 from construction engineering revenues less $100,000 salary to the construction engineer.)

The U.S. producer deduction is equal to 9% of the lesser of:
• Qualified Production Activity Income of $200,000
• Taxable Income for the Year $325,000 (total revenues of $500,000 less total expenses of $175,000)

The deduction is 9% of $200,000, or $18,000. W-2 wages are $175,000 so the 50% limitation does not apply.

Keep in mind that this is a deduction and not a credit. The $18,000 reduces taxable income and its value is based on the taxpayer’s tax rate. If the taxpayer is in the 25% tax bracket, the $18,000 provided a $4,500 benefit.

To see how this applies to you, give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

When Are Membership Dues Deductible?

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club duesRecreational Club Does Are Not Deductible

The IRS doesn’t like it when business owners try to deduct expenses for recreational activity. For this reason, the IRS disallows deductions for club dues paid for membership in any club organized for pleasure, recreation, social, athletic, luncheon, airline frequent flyer, etc., purposes.

The dues disallowance rule does not apply to professional organizations (such as bar and medical associations), or civic or public service organizations (such as Rotary, Lions, and Kiwanis) as long as their principal purpose is not entertainment.

Certain organizations similar to professional organizations are also exempt from the dues disallowance rule. Examples include chambers of commerce, business leagues, trade associations, and real estate boards.

While dues for recreational clubs are not deductible, meals or entertainment costs incurred while using the club are deductible (subject to the 50% disallowance rule for meals and entertainment) if the taxpayer can prove a business connection for the expenses.

Example: Ritchie pays $10,000 to join a country club. He invites Fonzie to a meal at the country club and they conduct a substantial business discussion during the meal. The meal costs $100. The $10,000 fee to join the club is not deductible. However, the $100 meal is deductible since it qualifies as a deductible meal expense. However, the 50% disallowance rule reduces the deductible amount to $50 ($100 less 50% disallowance).

Entertainment Facilities

Similar to the club disallowance rule, the IRS denies a deduction for any expenses for an entertainment facility even if there is a business connection. An entertainment facility is any property owned or rented and used for entertainment, amusement, or recreation. Examples include yachts, hunting lodges, hotel suites, fishing camps, and swimming pools.

Again, while the cost of the entertainment facility is not deductible, any out of pocket costs incurred while using the entertainment facility for business are treated like any other deductible entertainment expense.

Example: Mork pays $5,000 to lease hunting rights. He invites Orson on a weekend hunting trip. Mork incurs $1,000 in food, supplies, and equipment during the weekend. The $5,000 to lease the hunting rights is not deductible. Some portion of the $1,000 will be deductible as an entertainment expense if Mork can substantiate the expenses as business entertainment.

To see how this applies to you, give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Avoid Late Penalties by Using the Right Delivery Services

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Private Delivery ServiceA tax return and certain other documents are treated as timely filed if they are postmarked by the due date of the return or document. The item has to be postmarked by either the U.S. Postal Service or certain Private Delivery Services (e.g., UPS, FedEx, etc.) for this rule to be effective.

The IRS recently updated its list of Private Delivery Services, which was last updated in 2004. The following Private Delivery Services will qualify for the timely mailing treated as timely filing/paying rule:

Federal Express:

  • FedEx First Overnight
  • FedEx Priority Overnight
  • FedEx Standard Overnight
  • FedEx 2 Day
  • FedEx International Next Flight Out
  • FedEx International Priority
  • FedEx International First
  • FedEx International Economy

UPS:

  • UPS Next Day Air Early AM
  • UPS Next Day Air
  • UPS Next Day Air Saver
  • UPS 2nd Day Air
  • UPS 2nd Day Air AM
  • UPS Worldwide Express Plus
  • UPS Worldwide Express

ONLY the above carriers and service levels qualify for the timely mailing treated as timely filing/paying rule. Thus, using UPS ground will not qualify.

Example: John submits his tax return to UPS on April 15. He sends it out UPS 2nd Day Air and the IRS receives the return on April 17. Since he used a qualified carrier/service, his return is treated as timely filed. If he sends it out UPS Ground (a nonqualified service) on April 15 and the IRS receives it on April 17, his return is considered filed on the day the IRS receives it (April 17). John’s return is filed late.

The postmark date for an item delivered after the due date is presumed to be the day that precedes the delivery date by the amount of time allowed for the service used. For example, in the above example, the IRS received John’s tax return on April 17, two days after the due date. Since the return was sent 2nd day, the IRS will treated April 15 as the postmark date.

Under this presumption, if the document is delivered late (e.g., a 2nd Day delivery that arrives in 3 days), the taxpayer is presumed to have filed late.  To overcome this presumption, taxpayers will have to prove that the carrier received the item before the due date. This can be done by providing the IRS a written confirmation produced and issued by the carrier.

To see how this applies to you, give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

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