Sal Curcuru

Sal Curcuru

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Four Major Life Events that can Affect Your Tax Bill

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Even after you’ve filed your income-tax return, you’ll want to keep thinking about your tax situation. For example, if you experience any of the “life events” listed below in the past year, it may be a good time for some tax planning.

A job change. If you are eligible for a distribution from your former employer’s retirement savings plan, consider rolling the money into another tax-favored plan or an individual retirement account (IRA) to avoid the receipt of currently taxable income.

A home sale. You may exclude profit — within limits — on the sale of your principal residence from your taxable income if you meet the tax law’s requirements.

A marriage or divorce. File a new W-4 withholding allowance certificate with your employer or, if you pay quarterly estimated taxes, review the amount you are paying.

A new child arrives. As a parent, you may be eligible for various tax breaks. Ask us for details.

To learn more about how life events affect your taxes, give us a call today. Our staff of professionals are always happy to help.

IRS Announces Increases to 2018 Retirement Plan Dollar Limits

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The IRS announced the 2018 cost-of-living adjustments to retirement plan limits.  The following plan limits are increased effective January 1, 2018:

  • Employee Contributions to 401(k) and 403(b) Plans: the contribution limit is increased from $18,000 to $18,500.
  • Defined Contribution Plans: the limit on annual additions to a participant’s defined contribution account increases from $54,000 to $55,000.
  • Defined Benefit Plans: the limitation on the annual benefit under a defined benefit plan increases from $215,000 to $220,000.
  • Annual Compensation Limit: the maximum amount of annual compensation that can be taken into account for various qualified plan purposes increases from $270,000 to $275,000.
  • Government Deferred Compensation Plans: the limit on deferrals under Section 457 (concerning deferred compensation plans of state and local governments and tax-exempt organizations) increases from $18,000 to $18,500.

Some limitations are not increased for 2018, including:

  • The limitation for catch-up contributions to an applicable employer plan other than a SIMPLE 401(k) plan or SIMPLE IRA for individuals age 50 and over remains unchanged at $6,000.
  • SIMPLE Plans: the maximum amount of compensation an employee may elect to defer remains at $12,500.
  • IRS and Roth IRA Limits: the deductible amount for an individual making a deductible IRA contribution remains at $5,500.  The Roth IRA limit of $5,500 remains unchanged as well.

If you have any questions on how these rules apply to give, please give us a call.

What You Need to Know About Taxes when You Divorce

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Tax planning is an important step in finalizing a divorce agreement. Here are some issues divorcing couples may want to consider.

What’s in a Name?

Alimony and child support both involve one spouse making payments to the other, but that’s where the similarity ends. Alimony payments are tax deductible to the payer and taxable to the recipient. Child support is not deductible and can be received tax free.

Dependent — or Not?

Generally, the custodial parent claims the dependency exemption, although couples can make other arrangements. Parents with more than one child may decide to split the exemptions between them. Parents might also decide to alternate claiming the exemption.

Who Gets the Credit?

The parent who claims the child as a dependent typically is entitled to claim tax credits such as the child tax credit and the credit for higher education expenses. However, a custodial parent paying work-related child care expenses can claim the child care tax credit even if the other parent claims the dependency exemption.

 Assets To Transfer?

No taxes are owed on the transfer of assets between spouses. However, when dividing assets, it’s important to consider how taxes, such as capital gains, may come into play in the future.

How About Retirement Benefits?

Where retirement plan benefits have been made payable to a former spouse under a court-issued qualified domestic relations order (QDRO), subsequent distributions will be taxable to the former spouse.

For more information about divorce and taxes, give us a call today.

How to Determine the Value of Your Property Before You Donate

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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.

Do You Have a Business Continuity Plan? You Should

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What if disaster strikes your business? An estimated 25% of businesses don’t reopen after a major disaster strikes.* Having a business continuity plan can help improve your odds of recovering.

The basic plan

The strategy behind a business continuity (or disaster recovery) plan is straightforward: Identify the various risks that could disrupt your business, look at how each operation could be affected and identify appropriate recovery actions.

Make sure you have a list of employees ready with phone numbers, e-mail addresses and emergency family contacts for communication purposes. If any of your employees can work from home, include that information in your personnel list. You’ll need a similar list of customers, suppliers and other vendors. Social networking tools may be especially helpful for keeping in touch during and after a disaster.

Risk protection

Having the proper insurance is key to protecting your business — at all times. In addition to property and casualty insurance, most small businesses carry disability, key-person life insurance and business interruption insurance. And make sure your buy-sell agreement is up to date, including the life insurance policies that fund it. Meet with your financial professional for a complete review.

Maintaining operations

If your building has to be evacuated, you’ll need an alternative site. Talk with other business owners in your vicinity about locating and equipping a facility that can be shared in case of an emergency. You may be able to limit physical damage by taking some preemptive steps (e.g., having a generator and a pump on hand).

Protecting data

A disaster could damage or destroy your computer equipment and wipe out your data, so take precautions. Invest in surge protectors and arrange for secure storage by transmitting data to a remote server or backing up daily to storage media that can be kept off site.

Protecting your business

If you think your business is too small to need a plan or that it will take too long to create one, just think about how much you stand to lose by not having one. Meet with your financial professional for a full review.

For more tips on how to keep business best practices front and center for your company, give us a call today. We can’t wait to hear from you.

* www.sba.gov/content/disaster-planning

You’ve Been Provided with Free Identity Theft Protection. Is it Taxable?

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Identity theft occurs when a person wrongfully obtains and uses another person’s personal information (such as name, social security number, bank account information, etc.) in a way that involves fraud or deception, usually for economic gain.  It has become the number one consumer complaint to the Federal Trade Commission for 15 consecutive years.

Businesses, government agencies, and other organizations make significant efforts to secure the personal information of customers and employees.  Even though significant effort is put forth to combat identity theft, criminals are becoming increasingly sophisticated.  A data breach can expose personal information to criminals causing harm to their victims.  In response to such breaches, organizations often provide credit reporting and monitoring services, identity theft insurance policies, identity restoration services, or other similar services to customers and employees whose information may have been breached.

When Identity Theft Protection Services are Tax-Free

The IRS has received questions regarding the taxability of identity protection services provided at no cost to customers and employees whose personal information may have been compromised.   The IRS issued an announcement that it will NOT assert that an individual whose personal information may have been compromised in a data breach must pay tax on the value of the identity protection services provided by the organization that experienced the data breach.

Additionally, the IRS will not assert that an employer providing identity protection services to an employee whose personal information may have been breached must include the value of identity protection services in the employee’s taxable compensation.

When Identity Theft Protection Services are Taxable

The IRS also states that this tax-free provision does NOT apply to cash received in lieu of identity protection services, or to identity protection services received for reasons other than as a result of a data breach, such as identity protection services received in connection with an employee’s compensation benefit package.  This announcement also does not apply to proceeds received under an identity theft insurance policy.

What if Identity Theft Protection Services are Provided before a Breach Occurs?

The IRS received comments stating that an increasing number of businesses are combating data breaches by providing identity theft protection services to employees and other individuals before a data breach occurs in order to help detect any occurrence of a breach in their information systems, and to minimize the impact of their operations.

Accordingly, the IRS will NOT assert that an individual must pay tax on the value of identity protection services provided by the individual’s employer or by another organization to which the individual provided personal information.  Similarly, employees will not have to include in taxable income the value of such services provided by their employers.

Again, this announcement does not apply cash received in lieu of identity protection services or proceeds received under an identity theft insurance policy.

Comments or questions about this post?  Please let us know through the comment area below!

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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.

Current Status of Tax Reform

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The President recently reaffirmed his desire for a 15% business tax rate that applies to all business entities (C corporations, S corporations, LLCs, etc).  However, most analysts do not believe that a 15% tax rate is possible with a $20 trillion national debt.  The House Republican plan called for a 25% tax rate.

Service Businesses May Not Benefit

According to a recent piece in the Wall Street Journal, Secretary Mnuchin stated that the lower 15% tax rate would NOT apply to service businesses such as accounting (boo!!!) or law firms.  The idea is to tax these services businesses at a rate between the lower business tax rate and the tax rate that applies to wages.  That new rate would apply to pass-through service businesses but with boundaries to prevent it from being used by services businesses where the pass-through income more closely resembles wages…sounds perfectly workable!

Principles of Tax Overhaul

The President outlined four principles as guiding his tax reform efforts:

  • A fair and simple tax Code
  • A tax Code that is competitive with other nations’ tax Codes
  • Tax relief for middle-class families
  • Repatriation of overseas profits (i.e., lowering the tax on profits corporations bring back to the U.S. from foreign corporations).

What to Expect Next

Outside of general principles, details are still unknown.  Republicans plan to release details of tax overhaul on September 25.  If a tax cut is passed, it is expected to take effect retroactively to January 1, 2017.

 

Comments or questions about this post?  Please let us know through the comment area below!

If you found this article informative, subscribe to our Tax Newsletter.

Contact us for a Free Initial Consultation

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.

Rules for Deducting Rental Losses

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Rental losses may not be deductible because of the passive activity loss rules. The passive loss rules apply to activities in which taxpayers do not materially participate.  Taxpayers usually satisfy the material participation standard by being involved in a business for 500 hours per year (although there are several other ways of materially participating).  Passive losses can only be deducted against passive income.  Passive losses will also be allowed when the activity is disposed of in a taxable transaction (e.g., the activity is sold).  Congress created the passive loss rules in 1986 to curb tax shelter abuses.  Unfortunately, these rules also affect many legitimate activities.

Unfortunately, rental activities will be classified as passive activities even if the taxpayer materially participates in the rental.  Therefore, rental losses will not be deductible against other income until the rental activity is disposed of in a taxable transaction (e.g., the rental property is sold).

Fortunately, there are three ways rental losses may be deductible:

  • If the taxpayer actively participates in the rental activity, rental losses of up to $25,000 per year may be deductible
  • If the taxpayer meets the requirements to be classified as a real estate professional
  • If the activity is not treated as a rental by the tax law

Actively Participating in the Rental Activity

Taxpayers who actively participate in a rental activity can deduct up to $25,000 of rental losses per year.  Taxpayers actively participate in a rental activity through managerial functions such as deciding on rental terms, approving tenants, and approving capital expenditures.  Taxpayers must own at least 10% of the value of the rental activity to meet the active participation standard.  Finally, the $25,000 loss is reduced by 50% of the excess of the taxpayer’s adjusted gross income over $100,000.

Example:  Wilma owns a rental property.  She negotiates lease terms with potential tenants, approves tenants, and decides what improvements (repairs, carpeting, etc.) will be made to the property before leasing it out. Wilma’s adjusted gross income is $90,000.  Since Wilma decides on rental terms, approves tenants, and approves capital expenditures, she actively participates in the rental.  Her income is below the phaseout threshold so she can deduct up to $25,000 of rental losses.  

Real Estate Professionals

Real estate professionals may fully deduct rental losses.  A Taxpayer must meet the following three requirements to be classified as a real estate professional:

  • She must spend more than 750 hours per year in real property trades or businesses in which she materially participates (e.g., spends more than 500 hours in the activity) AND
  • She spends more than 50% of her time in real property trades or businesses in which she materially participates
  • She must materially participate in the rental activity for which she is trying to claim a loss

The term real property trade or business means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.

Example:  Barney is a real estate broker.  He spends 1,000 hours per year working as a broker.  He also spends 1,000 hours per year managing an apartment building that he owns.  The apartment building will suffer a $100,000 rental loss this year.  These are Barney’s only activities.  Since Barney spends 2,000 hours per year on real estate businesses and 100% of his time is spent on real estate businesses, he is a real estate professional.  Since Barney spends more than 500 hours in the apartment building activity, he materially participates in the apartment building activity.  Barney meets the requirements of the real estate professional exception and may fully deduct the $100,000 loss.

Activities Not Treated as Rentals by the Taw Law

Rental activities of a very short duration or that require substantial services along with the rental property may be classified as business activities rather than rental activities.  This is due to the increased involvement of the taxpayer in such activities.  If a rental activity is classified as a business activity, taxpayers may be able to deduct losses if they materially participate.  Normally, rental losses are not deductible even if taxpayers materially participate (unless the active participation or real estate professional exceptions apply).

The following rental activities are treated as non-rental activities:

  • The property is rented by each customer for an average of seven days or less (e.g., hotel rooms or cars)
  • Significant personal services are provided, and each customer rents the property for an average of more than seven, but no more than 30 days (e.g., a dude ranch or resort).
  • Extraordinary personal services are provided, regardless of the average period of customer rental (e.g., nursing home).
  • The rental is incidental to the taxpayer’s nonrental activity, (e.g., the rental of a parking lot for a special event). If the gross rental income in those situations is less than 2% of the lesser of the property’s unadjusted basis or its fair market value, the rental of the property is considered incidental to a nonrental activity.
  • The property is made available by the taxpayer during defined business hours for nonexclusive use by various customers (e.g., a golf course that has both daily customers and customers who purchase long-term passes).

If the taxpayer conducts one of these activities, she will be able to deduct losses as long as she materially participates in the activity.

Comments or questions about this post?  Please let us know through the comment area below!

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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.

 

Leave-Based Donation Programs for Victims of Hurricane Harvey

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In response to the extreme need for charitable relief for victims of Hurricane Harvey, some employers are adopting leave-based donation programs.  Under these programs, employees can essentially donate their vacation and sick pay to charitable organizations.

The IRS recently issued a notice that cash payments an employer makes to a charitable organization in exchange for vacation, sick, or personal leave that its employees elect to forgo will NOT constitute income or wages of the employee if the payments are:

  • Made to charitable organizations for the relief of victims of Hurricane Harvey and Tropical Storm Harvey and
  • Paid to the charity before January 1, 2019

The IRS will not allow double dipping—employees won’t have to claim the donated vacation, sick, or personal leave time as income but they will also not be allowed a charitable donation for the amount donated.

The employer will take a business (and not a charitable deduction) for the amount of vacation, sick, or personal leave time donated.

People also need to be aware of scam artists that have created fraudulent charities.  The IRS cautions people wishing to make disaster-related charitable donations to avoid scam artists by following these tips:

  • Be sure to donate to recognized charities.
  • Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. The IRS website at IRS.gov has a search feature, Exempt Organizations Select Check, through which people may find qualified charities; donations to these charities may be tax-deductible.
  • Don’t give out personal financial information — such as Social Security numbers or credit card and bank account numbers and passwords — to anyone who solicits a contribution. Scam artists may use this information to steal a donor’s identity and money.
  • Never give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the donation.
  • Consult IRS Publication 526, Charitable Contributions, available on IRS.gov. This free booklet describes the tax rules that apply to making legitimate tax-deductible donations. Among other things, it also provides complete details on what records to keep.

Comments or questions about this post?  Please let us know through the comment area below!

If you found this article informative, subscribe to our Tax Newsletter.

Contact us for a Free Initial Consultation

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.

Restaurant Owners–What Are Your Numbers Really Telling You?

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Successful restaurant owners are focused on providing high quality food at reasonable prices and with very good service.  This is obviously a very important focus for restaurant owners.  Successful restaurant owners also know that there is a numbers side to the business—how profitable is the restaurant?

It is helpful for restaurant owners to know how their financial numbers look compared to their competition.  When restaurant owners compare their numbers to industry norms, interesting questions tend to arise.  They begin to take closer looks at certain aspects of their restaurants to make sure they are operating the restaurants as profitably as possible.

Our firm has access to real-time databases and we were able to gather information on privately held restaurants in Michigan with sales of $1 million and under.

We found the following information (percentages of sales):

Average Cost of Food    42.57%

Average Gross Profit      57.43%

Payroll                              22.22%

Rent                                  5.92%

Advertising                       4.16%

Example: JoJo’s Restaurant has the following Profit & Loss Statement:

Sales                      $1,000,000

Cost of Food               600,000  (60%)

Payroll                        280,000  (28%)

Rent                           100,000  (10%)

Advertising                   50,000  (5%)

There are some things to note:

JoJo’s cost of food is slightly higher than the average.

This can be caused by:

  • Underpricing the competition
  • Paying higher food costs than the competition
  • Buying higher qualify food than the competition
  • Inventory walking out the back door
  • High inventory waste or spoilage
  • Over-portioning
  • Inventory being eaten by the owners/employees and it’s still being counted as food cost expense

JoJo’s cost of labor is higher than the competition

This can be caused by:

  • Scheduling too many employees during shifts
  • Paying employees a higher wage/salary
  • Employees are moving slowly
  • Having too few employees and paying some employees overtime
  • Employees clock in early and clock out late

Going through the numbers on a regular basis may not be the most interesting thing to do, but it will reveal things about your restaurant that could surprise you.

Learn More About Restaurant Accounting and Tax Services We Provide

Schedule a Free Tax Analysis

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