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Archives for October 2012

Rent Property from a Spouse to Cut Self-Employment Tax

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Sole proprietorships (including single member LLCs) have to pay self-employment tax of 13.3% on their business income.  Rental income from real estate is generally not subject to self-employment tax.  An interesting strategy exists when a proprietorship rents property that is jointly owned with his or her spouse.

When a proprietorship leases real property that is owned by the business owner and her spouse, the business owner may claim a rent deduction equal to the ownership percentage of her spouse.  For example, if a business owner and her spouse each own 50% of a building, the business owner may deduct 50% of the rent expense.  This deductible 50% represents the spouse’s 50% ownership interest in the property.  The business owner cannot deduct the 50% of rent that she essentially pays to herself.

Example:  Wilma, a sole proprietor, has a legal practice that is run out of an office that she jointly owns with her husband, Fred.  Wilma pays $10,000 per year in rent to herself and to Fred.  Wilma may claim a rent deduction of $5,000 for the rent that is deemed to be paid to Fred.  She may not deduct the $5,000 rent she is deemed to have paid to herself. 

Notice that the $5,000 deduction does not reduce their overall taxable income—the $5,000 Wilma deducts is equal to the $5,000 of rental income Fred receives.  However, Wilma’s business income is subject to self-employment tax, but Fred’s rental income from real property is not.  The $5,000 deduction reduces Wilma’s self-employment tax by $614.  This strategy basically allows income to be exempted from self-employment tax by shifting it from being self-employment income to rental income that is not subject to self-employment tax.

In addition, Fred may deduct his share of the building’s depreciation, property taxes, interest expense, and other operating expenses.  Although Wilma cannot take a rent deduction for her 50% ownership, she may claim a depreciation deduction for her 50% ownership of the property plus her share of property taxes, interest expense, and other operating expenses.  Wilma’s property expenses will also reduce her self-employment income.

Example 2:  Same facts as above, except that Fred owns 100% of the building.  Since Wilma owns no portion of the building, she may deduct 100% of the $10,000 rent expense she pays to her husband.  Her husband will report the full $10,000 as rent income.  Wilma’s self-employment income is reduced by $10,000, saving her $1,228.  Fred will claim depreciation, property taxes, interest expense, and operating expenses for his 100% ownership of the property.

 

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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.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230

New Law Allows Michigan Unemployment Tax to Be Paid In Installments

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The Michigan Unemployment Tax applies to the first $9,500 of each employee’s wages during each year.  Once an employee reaches $9,500 of wages in a year, the employer does not have to pay unemployment tax on that employee’s excess wages for the rest of the year.  Businesses with low employee turnover tend to have larger unemployment tax liabilities in the first two quarters.  This is because employees (especially full-time employees) will hit the $9,500 wage limit fairly early in the year.  Employers with higher turnover have employees starting later in the year and will thus have taxable wages in later quarters.

Example:  ABC Corp has ten full time employees who earn $10,000 per quarter.  ABC Corp has a 5% unemployment tax rate.  ABC Corp’s total wages for the first quarter are $100,000.  Taxable wages for the first quarter are $95,000 (the first $9,500 of each employee’s wages).  ABC Corp’s unemployment tax due is $4,750.  As long as ABC Corp does not hire additional employees during the remainder of the year, ABC Corp will not have an unemployment tax due for the remaining three quarters of the year because each employee reached the $9,500 limit in the first quarter.

Beginning in 2013, certain employers will be able to spread their first quarter Michigan Unemployment tax liability over four equal quarterly payments.  For example, in the above fact scenario, ABC Corp has to pay $4,750 by April 25.  If ABC Corp qualifies under this provision, it can pay the $4,750 in four equal payments of $1,187.50 with its four Michigan unemployment tax returns for the year.

To qualify:

  • A business have 25 or fewer employees on January 12th of the prior year AND
  • 50% or more of the business’ total previous year’s tax were payable with the first quarter report.

If the business qualifies, it can make an election on its first quarter report and pay the first quarter tax over four quarters.   Beginning in the second quarter, the total amount due for each quarter will be the unemployment tax for payroll in that quarter plus the carryover of the first quarter’s tax.

Example:  It is 2013.  XYZ Corp had 20 employees as of January 12, 2012.  Its unemployment tax liability in the first quarter of 2012 was $5,000 and its total tax liability for the year was $8,000.  Since XYZ Corp had 25 or fewer employees as of January 12 of the prior year and 50% or more of its prior year unemployment tax was payable in the first quarter, it meets the requirements to spread its 2013 first quarter liability over four quarters.

Continuing on with the example—If XYZ Corp has $6,000 of tax due in the first quarter, $2,000 in the second quarter, $1,000 in the third quarter, and no tax liability in the fourth quarter, its 2013 Michigan unemployment taxes due will be:

1st quarter:          $1,500 (one quarter of $6,000)

2nd quarter:         $3,500 (one quarter of $6,000 plus 2nd quarter liability of $2,000)

3rd quarter:         $2,500 (one quarter of $6,000 plus 3rd quarter liability of $1,000)

4th quarter           $1,500 (one quarter of $6,000 plus 4th quarter liability of $0)

 

If you need help with small business taxes,

sign up for a FREE tax 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.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230

 

Deducting a Leased Car in Your Business

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Image result for vehicleWhen a taxpayer leases a vehicle and uses it in a trade or business, the taxpayer may deduct the lease expense based on the proportion that it is used for business.  For example, if a business owner uses her leased vehicle 80% for business, then she may deduct 80% of the lease payments as a business expense.  Instead of deducting the lease payments and other operating expenses of the lease vehicle, taxpayers also have the option of using the standard mileage rate (57.5 cents per mile in 2015) for business miles.

The IRS is concerned about taxpayers buying luxury vehicles and taking business deductions for them.  To combat this abuse, the IRS placed limits on how much a taxpayer can depreciate a luxury vehicle per year.  The IRS got pretty stingy when it defined a luxury auto—any vehicle over roughly $16,000 is considered to be a luxury auto.  Likewise, when a taxpayer leases a luxury vehicle, he will have to reduce the lease expense by a lease inclusion amount that is based on the fair market value of the vehicle.  The lease inclusion amount applies to vehicles that are leased for more than 30 days.  Taxpayers who use the standard mileage rate to deduct leased auto expenses do not have to reduce their auto expenses by the lease inclusion amount.

To determine the lease inclusion amount, the fair market value of the vehicle must be determined.  The fair market value is equal to the capitalized cost of the auto if that figure is specified in the lease agreement.  If the capitalized cost is not specified in the lease agreement, the taxpayer may refer to a publication such as Kelley Blue Book to determine the fair market value of the auto.

Example:  John begins a lease on a Buick Regal during 2015.  John uses the vehicle 100% for business.  His lease payment is $300 per month and the capitalized cost in the lease agreement is $30,000.  John’s lease expense for 2012 is $3,300.  The lease inclusion amount for 2015 based on a $30,000 fair market vehicle is $9.  Therefore, John lease expense for 2015 is $3,291 ($3,300 lease payment less $9 lease inclusion amount).

Example 2:  Same as above, except that John uses the vehicle 80% for business.  John’s lease expense is now $2,640 ($3,300 lease payment times 80% business use).  His lease inclusion amount is $7.20 ($9 times 80% business use).  His lease expense for 2015 is therefore $2,632.80.

As you can see, the lease inclusion amount isn’t too big of a deal.  But it’s still something that has to be tracked.

If you need help with small business taxes,

sign up for a FREE tax 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.