The Tax Corner

IRS Announces Three-Month Filing, Payment Extension Following Boston Marathon Explosions

2013-04-22T08:49:00.001-04:00

IRS Announces Three-Month Filing, Payment Extension Following Boston Marathon Explosions

2013-02-20T08:58:00.000-05:00

Small Business gets a Break on Start Up Expenses

When and how do I deduct expense incurred before I opened my business?

Most new business and rental property owners will pay or incur expenses for investigating the viability of a business and expenses before actually opening the business or renting the property. These expenditures are known as startup costs and examples include analysis of potential markets and products, advertisements for the opening of the business, salaries and wages for training and education, and other expenditures that would normally be deductible if the business were open. These costs are covered in Internal Revenue Code 195 expenditures and have specific rules on when and how a tax deduction is elected.

The law requires these costs to be capitalized and not automatically deductible in the current year as a periodic cost. However, an election may be made to expense up to $5,000 of these costs in the year in which the business opens. This $5,000 deduction is reduced dollar for dollar once startup costs exceed $50,000. Thus if start up expenditures exceed $55,000 no deduction is allowed. The election is made on Part IV of Form 4562 and is due by the date of the return including extensions. The remaining balance of startup expenses must be amortized over 15 years or 180 months. If the trade or business is disposed of before startup expenses are fully amortized the remaining g costs may be deductible in the year the business closes.

The organization costs of business entities are often confused with startup expenses. Although there are similarities in how they are treated by the IRS they should be segregated. The IRS considers these expenses a separate cost and consequently a separate election is made for organizational costs.

Electing to deduct all or portion of startup expenses depends on the particular situation of the business, the owners of the business, and future operations. You should always speak with your trusted advisors about your particular situation.

Energy Credits

2013-02-06T09:48:00.001-05:00

Energy Efficient Tax Credits

The fiscal cliff bill also known as the American Taxpayer Relief Act of 2012 extended certain tax credits for energy efficient purchases made in 2012 and 2013. Due to this late change by Congress the IRS is currently updating their Form 5695 and e-file computer systems. They recently announced they do not anticipate being able to accept returns with this credit until late February or early March.

The most common credit is for improving the energy efficiency of your principal residence. The items considered for this credit included purchases made for biomass stoves, HVAC equipment, insulation, roofs, water heaters, windows and doors, and other improvements to the envelope or shell of the home. A building envelope is generally defined as any insulation or system that is designed to prevent heat loss or gain. The most common is a metal roof with certain pigmented coatings or asphalt roof with certain cooling granules. This credit is generally 10% of the purchase price and in some cases labor for installation. The annual credit limit for windows is $200, $150 for a furnace or boiler, and $300 for most other items. There is a lifetime maximum credit of $500 and is a nonrefundable credit with any unused amount being carried forward to subsequent years.

Another credit that is becoming more popular is the use of alternative heating and cooling systems. These include solar energy systems, wind turbines, and geothermal heat pumps. These tax breaks do not expire until December 31, 2016. The credit is generally 30% of the cost of the eligible property and is also nonrefundable. In general terms if you use the sun, the wind, or the ground to provide electricity or to heat your home you could be eligible for the credit.

A question I often get asked is the use of energy efficient appliances. Currently there is no income tax credit in place for use of these appliances in your home.

More detailed information on the available credits may be found at www.energystar.gov.

Qualified joint ventures

2013-01-31T09:49:00.001-05:00

Treatment of Business Owned Jointly by Husband and Wife

Based on the definition of a partnership, an unincorporated business entity owned by two individuals, including spouses in non-community states, should file an annual partnership return. After years of complaints from practitioners and business owners Congress changed the law in 2007 with the Small Business and Work Opportunity Tax Act. Because of the Act a business owned by only a husband and wife could elect to allocate the income on their joint return and avoid filing a partnership return. The term given to this type of business was “Qualified Joint Venture” (QJV). In addition to being only owned by husband and wife, both spouses must materially participate, and file a joint return.

The consequence of this election is that the husband and wife must file and report their share of income and expense according to the percentage of ownership on Schedule C or F if it is a farm. There was not clear guidance in the Act on whether this election applied to rental properties normally reported on Schedule E and its impact on self-employment taxes. There still has not been any formal guidance on this subject, but the IRS Chief Counsel issued CCA 200816030 in 2008. In this advice the chief counsel stated that electing QJV for rental property did not convert the income to self-employment income, but that the rental property should be reported on Schedule C.

While some guidance was issued regarding rental properties there remains some question on the treatment of husband and wife LLCs. The Code does appear to be unclear if an LLC qualifies for this election and no formal guidance has been issued. However, the IRS did put some information on its website to help taxpayers and practitioners. While the article on their website has no legal authority it does give us an idea how they interpret the statuary language. The article advises that a QJV election is not available when there is a separate legal entity. This would seem to rule out limited liability companies formed under state law. Again there is no legal authority for this IRS article, but one should consider if it would be worth the time and costs to fight the IRS on the matter, especially considering that there are steep penalties for the non-filing of partnership returns.

A taxpayer must also consider state laws and requirements and whether the allocating of income for federal purposes must be combined for state income tax purposes. Often a QJV falls under the rules have a unitary business group and must be reported as one entity.

Due to the IRS guidance and sometimes complicated state laws it is generally my recommendation to file a partnership return even if you meet the definition of a QJV, especially if you are an LLC.

2013-01-09T15:24:00.003-05:00

Start of tax season delayed until Jan. 30 at the earliest!!!

The IRS announced on Tuesday that it plans to open the 2013 filing season on January 30 for "some" taxpayers.

The fiscal cliff crisis has caused a crisis for the IRS and tax accountants. Our tax season is undoubtedly going to be shrunk into a few weeks less than last year. The IRS is trying to program their computers to be able to accept e-filed returns for changes to the law as well as put out proper forms.

The opinion of many is that most businesses and individuals will not be able to file until February or March. This is likely true for those that have depreciation expenses, residential energy credits, or have other general business credits.

Oh this is going to be fun!

2013-01-09T15:16:00.001-05:00

How does avoiding the cliff impact your taxes?

Undoubtedly you have been hearing about how Congress avoided the fiscal cliff, but may not be sure how it is going to impact you or you may just assume it will not. By the time you read this article you may have already been impacted by the new tax laws. Your first check paid in 2013 will be less than your last one in 2012 due to the expiration of payroll tax cuts. Since 2011 you enjoyed a temporary decrease in social security taxes from 6.2% to 4.2% which expired January 1, 2013. This 2% decrease in take home pay not only impacts all wage earners, but also self-employed individuals since the self-employment tax will return to 15.3% for 2013 after a 2% reduction to 13.3% for both 2011 and 2012. Here are a few other deals that were struck in the eleventh hour in the American Taxpayer Relief Act of 2012.

For the average American the ordinary tax rates will stay the same as they were in 2012. The only rates that changed were for single taxpayers with incomes over $400,000 and married filing jointly (MFJ) with incomes over $450,000. These taxpayers will see their top rates increase by 4.6% from 35% to 39.6%. In addition, the capital gains rates for these taxpayers have increased from 15% to 20%. (Some taxpayers may also pay another 3.8% due to healthcare reform act if their income exceeds $200,000 for individuals or $250,000 for joint filers.) All other taxpayers will continue to pay capital gains rates of 15% or nothing depending on their income levels.

Certain family tax breaks have also been extended. The most common is the Child Tax Credit which was set to decrease to $500 per child under 17, but will now remain at $1,000 per child. The American Opportunity Tax Credit which provides up to $2,500 a year in tax breaks for education and is partially refundable. The childcare credit was permanently extended which allows up to 35% of childcare expenses to a maximum of $6,000 for two children. The Earned Income Credit was made permanent or extends to 2017 certain enhancements which help those with low and moderate income levels.

For those with estate tax consideration the top tax rate increased to 40% with a $5,000,000 lifetime exclusion that will be adjusted annually for inflation. Also, portability between spouses was made permanent.

For businesses, the accelerated expensing and bonus depreciation of equipment purchases that was in place for 2011 was extended through 2013. Also, the research and development credit was also extended through 2013.

And my favorite…the alternative minimum tax (AMT) fix was made permanent. The Act provides for an annual inflation adjustment to the exemption amounts beginning with 2012 saving millions of middle class taxpayers from the ‘AMT trap”.

2012-11-26T11:06:00.002-05:00

2012-11-08T08:41:00.003-05:00

AMT Trap

2012-11-06T13:35:00.000-05:00

Most Americans have never heard of the Alternative Minimum Tax (AMT) because it has not yet impacted them, but barring any late changes to the Internal Revenue Code by Congress many more will be forced to pay AMT for 2012. We essentially have two different tax systems in the US, the regular income tax and the AMT. The AMT system was put into place in 1969 to ensure that the wealthy were paying a minimum of taxes regardless of certain tax breaks. The problem is that the definition of wealthy for AMT purposes 43 years ago has never been permanently adjusted for inflation. In recent history Congress has put in an AMT “patch” each year to lessen the impact on the middle class. For 2012 nothing has been done to date and there is fear that nothing will be done. It has been estimated that if no patch is put in place 26 million households will for the first time be paying AMT with an average increase of $3,700.

The calculation of alternative minimum taxable income can get complicated, but in its simplest terms you have to add back certain deductions in figuring your taxable income. The most common add back items are the standard deduction, personal exemptions, property taxes, state and local income taxes, miscellaneous itemized deductions subject to the 2% floor, home equity loan interest, and medical expenses are not deductible until greater than and 10% of your AGI vs. 7.5% under the regular tax system. These add backs have not historically been a problem due to the AMT exemption amounts.. As part of the 2010 Tax Relief Act the 2011 exemption amounts were $74,450 for married couples filing jointly and $48,450 for single filers. However, for 2012 the exemptions are scheduled to revert to $45,000 and $33,750. Your alternative minimum taxable income is the subject to a 26% or 28% tax rate depending on income level. Although the AMT tax rate is lower than the highest regular tax rate the amount of tax paid is greater due to the higher taxable income subject to AMT being higher.

Most political lobbyists feel that it is hard to imagine Congress not enacting another patch for 2012 so this tax will not impact middle class Americans since this was not the original intention of the AMT. However, due to the uncertainty of the political climate and the lateness of any possible enactment of legislation there are those that are concerned that 2012 is the year AMT will impact many unsuspecting taxpayers. You should review your AMT tax situation for 2012 and plan accordingly for the potential increase in tax.

Inherited IRA

2012-08-07T13:38:00.002-04:00

What are the tax consequences of an inheriting an Individual Retirement Account?

This question is becoming more and more common as the first generation that used an individual retirement account (IRA) are beginning to pass on these accounts after their death. Traditional IRAs contributions are generally tax deductible in the year of contributions and taxable when distributions are taken. When the owner of the IRA reaches 70 ½ they must take a required minimum distribution (RMD) based on IRS life expectancy tables. Upon their death the tax laws that apply to heirs vary depending on the beneficiary and what is done with the account.

The rules for spouse beneficiaries who inherit IRAs can be relatively simple. A spouse may take an IRA and move them into an IRA in their own name. This action, known as a spousal rollover, allows the spouse to treat inherited assets as his or her own and to commingle those assets with other IRA assets and treat them identically. For purposes of determining any required minimum distributions, the living spouse's age is used to determine the appropriate amount that the spouse must withdraw. This option usually offers the most flexibility to the surviving spouse and is also the easiest in regards to paperwork and complexity. However, spouses also have the same options as other beneficiaries.

Beneficiaries other than spouses have more limited options. Non spouses are not allowed to rollover the deceased’s IRA into their own IRA account. Instead, they must contact the financial institution that manages the IRA and set up a new account that specifically refers to the fact that the assets have been inherited, e.g., “Brian Kelsch Inherited IRA”. Non spouses are required to begin taking distributions based on either of two options. They may elect to take out the entire account balance by the end of the fifth year following the death of the original account owner. If the beneficiary chooses this option, then no distributions are required before the end of the fifth year. If it is a traditional IRA these distributions are taxable in the year of withdrawal.

Beneficiaries and spouses can also elect to take minimum distributions over the course of their lifetime. The amount of the required distribution is determined by referring to an IRS life expectancy table. By using this method, beneficiaries can greatly extend the period over which they must take distributions, offering potential years of tax deferred growth. Beneficiaries who wish to take distributions over their lifetimes must make sure that they take the first required distribution by December 31 of the year following the death of the original account owner.

Another option is for beneficiaries to disclaim all or part of your inherited assets within nine months of the IRA owner's death so they pass to the next eligible beneficiaries possibly extending the tax deferred growth even longer.

Did you deduct Medicare premiums on your Schedule C?

2012-07-30T08:29:00.000-04:00

The IRS clarified that self-employed individuals are entitled to deduct from their self-employment income Medicare premiums paid during the taxable year. It further provided that a taxpayer may file an amended return to claim a refund for each year Medicare premiums were not taken as a deduction in calculating self-employment income as long as the statute of limitations was still open for those years.

Prior to 2010, the instructions to Form 1040 specifically stated that Medicare premiums could not be taken as a self-employed health insurance deduction on a taxpayer’s Form 1040. In 2010, the instructions were revised to include Medicare premiums as a qualified insurance deduction under section 162(l) of the Internal Revenue Code. At the time the instructions were updated, the IRS did not provide guidance or reason for the change in their position.

Click here for IRS Memo

2012-07-13T09:27:00.001-04:00

Even tax accountants have fun once in a while.

2012-07-10T09:00:00.000-04:00

This is off the coast of Portland, ME on July 7, 2012. It was 6 ft Blue shark about 150 pounds.

2012-07-03T09:24:00.002-04:00

President Obama's Affordable Care Act, which was deemed constitutional last Thursday by the Supreme Court, includes some major tax changes that took effect in 2010 and 2011, some that will take effect next year and some that will be implemented over the coming years. All of us in some way will be impacted by this Act either directly or indirectly and the politics will continue to be debated. I am staying clear of that debate, but will provide information on just a few of the more well know tax impacts of the Act.

The most well-known part of the Act is a penalty or tax (the parties are arguing which is the correct term) for not obtaining health insurance. This tax/penalty will phase in from 2014 to 2016 and eventually range from $695 to approximately $4,700 per person in a family, depending on income levels. The maximum tax/penalty will be capped at 3 times the per person limit.

The other more talked about tax is an increase in Medicare tax. Right now, the Medicare tax on salary and/or self-employment income is 2.9%. If you're an employee, 1.45% is withheld from your paychecks, and the other 1.45% is paid by your employer. If you're self-employed, you pay the whole 2.9% yourself. Starting in 2013, an extra 0.9% Medicare tax will be charged on salary and/or self-employed income above $200,000 for an unmarried individual, $250,000 for a married joint-filing couple, and $125,000 for those who use married filing separate status. For taxpayers with adjusted gross income above these levels there is also a surtax of 3.8% on net investment income that will begin in 2013, the same year capital gain rates are scheduled to return to 20% and dividends will again be taxed at ordinary rates. Net investment income includes interest, dividends, royalties, annuities, rents, income from passive business activities such as partnership and S-corporations, and gains from assets held for investment like stock and other securities. The additional 3.8% Medicare tax will apply to the lesser of your net investment income or the amount of AGI in excess of the applicable threshold.

Another increase in tax may come in the form of decreases in tax deductions. Flexible spending accounts will have a limit of $2,500 in 2013 versus unlimited amounts currently. Additional decreases in deductions may come on your Schedule A for itemized deductions. You can claim an itemized deduction for medical expenses paid for you, your spouse, and your dependents, to the extent the expenses exceed 7.5% of AGI. Starting in 2013, the hurdle is raised to 10% of AGI. However, if either you or your spouse is age 65 or older at yearend, the 10%-of-AGI threshold will not take effect until 2017.

In researching for this article it became evident that there is a tremendous amount of misinformation on the Act and its content. Be sure to do your own research and check your sources.

Please remember these are general rules and you should always speak with your trusted advisors about your particular situation.

2012-06-27T16:18:00.004-04:00

Nothing to do with taxes, just funny.

2012-06-01T14:50:00.002-04:00

Steps To Take Before You Sell Your Business. It is not always about money that causes the stress after the sale.

2012-05-31T08:26:00.001-04:00

Great video on LinkedIn, what it is, and how to use it properly from CEO.

2012-05-23T09:09:00.002-04:00

Attended the Big Night Out hosted by the Lilliputian Montessori School on Friday night at the 1785 Inn. @1785Inn It was a great night with good food, friends, many auctions items and a worthy fundraiser. The only down side was a friend @ralphcronin1 taking my bidding number and deciding I needed every other item in the place. I was surprised at my bill when I checked out and "won" framed poetry.. Paybacks are always worse.

2012-05-23T08:55:00.002-04:00

I began collecting Social Security in 2012. How much of this is going to be taxed?

Congratulations on getting to point of being able to collect Social Security benefits after presumably many years of paying into the system. Now you may have to turn around and give some of it back to the government depending on a myriad of factors. Usually nothing is straightforward with tax calculations and the taxation of Social Security benefits definitely falls into this category.

The answer is that none or up to 85% will be taxable depending on what the IRS identifies as your provisional income and base amounts of your filing status. Your provisional income is generally your adjusted gross income plus tax-exempt interest plus 50% of your total Social Security benefits. For single taxpayers the relevant base amounts are $25,000 and $34,000. For married filing joint filers the amounts are $32,000 and $44,000.

First let’s look at filers with income below the greater of the two base levels. If your provisional income is less than your base amount none of your social security benefits will be taxable. For every $1 of provisional income between the lower and upper bases, 50 cents of your Social Security benefits become taxable, up to 50% of your total benefits.

For those with provisional income above the upper bases for every $1 of provisional income above the upper bases, 85 cents of your Social Security benefits become taxable, up to a total taxable amount of 85% of your benefits.

A problem that I hear often is that taxpayers are not prepared for tax bill that comes due to the taxation of Social Security benefits. Often times during the early years of collection taxpayers are still working and have income greater than the upper base thus making 85% of the social security benefits taxable. Consider someone collecting $20,000 in benefits and in the 15% tax bracket will have an additional tax liability of $2,550 ($20,000 x 85% x 15%). Another problem area is when retirees elect to take a one-time significant withdrawal from their traditional IRA or other taxable retirement account which can make their Social Security benefits taxable when in prior years it was not.

If you are facing tax liability at the end of the year you should consider paying estimated taxes or having federal income taxes withheld from your Social Security benefits. You can do this by visiting http://www.ssa.gov/planners/taxwithold.htm and following the instructions.

The collecting of Social Security benefits is payback for all the years you have contributed to the system, but don’t let it be a tax burden at tax filing time.

2012-05-09T10:07:00.000-04:00

ONE OF THE MANY REASONS THE US IS IN DEBT.

This is our system at work. CLICK HERE FOR VIDEO. Giving away money to people that don't even live here. And no one seems to do anything about it.

2012-04-23T11:04:00.001-04:00

What happens to capital loss carryforwards in a divorce or on the death of a spouse?

Capital losses belong to the person who incurred them regardless of filing status. In the case of a jointly owned brokerage account, the losses are split evenly between the owners. So following the final joint tax filing after divorce or the death of a spouse you may carry forward only half of the losses from any joint accounts or property.

That means if a spouse who is severely ill has significant capital losses, the couple may wish to utilize those losses to minimize capital gains by selling appreciated assets and offsetting the gains with loss carryforwards.

Typically I recommend that clients not realize capital gains for the sole sake of using their capital loss carryforward. But if there is concern for the longevity of the owner of the capital loss carryforward, then there could be significant tax planning for the utilization of those losses.
To retain the full capital loss carryforward the loss would have to result from assets held in the name of the surviving spouse, rather than a joint account. Capital losses are locked in when the loss is taken, so transferring remaining assets to the healthy spouse will not help retain the dying spouse's share of capital losses.

In a divorce situation the same basic rules apply. Any losses in accounts held jointly are split between the former married couple. Losses incurred in separately owned accounts stay with the owner. There are no special forms to file with the IRS. The carryovers get reported on each individual’s respective Schedule D in subsequent years after the divorce.

Divorce courts and decrees may allocate the assets and investments accounts to former spouses and often times taxpayers believe the losses from that account are also transferred. Regardless of state law, the losses for federal purposes are carried forward by the individual that sustained the loss.

Home office

2012-03-07T08:28:00.002-05:00

Home Office Deductions
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses include insurance, depreciation, mortgage interest, utilities, and repairs.
There are two basic requirements for your home to qualify for the home office deduction. First, you must use part of your home regularly and exclusively for conducting business. For example, if you use an extra room to run your online business or as administrative office space, you likely can take a home office deduction.
Secondly, you must use your home as your principal place of business. This test tends to be more difficult to meet. If you conduct businesses at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction. For example, if you have in-person meetings with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business. You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or the only place where you meet patients, clients, or customers.
Generally, deductions for a home office are based on the percentage of your home devoted to business use. This percentage is multiplied by the expenses of our home noted above. Often not taken by taxpayers is depreciation expense because they do not want to pay taxes when the home is sold on the deprecation previously taken. This may not be the best position since the IRS may impose tax on depreciation allowed or allowable regardless of whether you actually took the expense.
Some feel that home office deductions are “red flags” to the IRS. The IRS has become more lenient in this area in the last decade, but you should still be sure you’re within the rules. My response to “red flags” is that is that if you have a right to a deduction you should take the deduction.

2012-02-29T08:22:00.000-05:00

2012-02-29T08:16:00.004-05:00

Q: I own a small business and use QuickBooks. I heard the IRS is now allowed to look at my QuickBooks file during an audit. Is this true?

Most of my clients tend to use QuickBooks or other popular off the shelf programs for their accounting records so this question is very important. Apparently, in its recent examinations of small businesses the IRS has begun requesting electronic files of QuickBooks from taxpayers. The tax court has recently ruled in one particular case that a taxpayer has to comply with this request or face a summons. There will no doubt be additional cases brought regarding this issue, but initial rulings tend to side with the IRS.
While the taxpayer appears to be legally required to provide the files, they are not required if the request is unreasonable. The IRS has instructed their auditors to limit their request to a single year unless the prior years are needed to verify certain items on the return of the year under audit.
So what does this mean to you? You should be careful what information you put in your QuickBooks file including any personal information you do not want an IRS agent to see. I encourage all my clients to try not to commingle personal and business money into one account. It tends to confuse the IRS and adds a great deal of complexity to an audit and tax preparation as well. I also encourage business owners to consider their talents and decide if their time is best spent learning QuickBooks or growing their business. It is often beneficial to hire a qualified bookkeeper to handle their accounting in order to ensure their records are complete and accurate.
You should consider the consequences of the audit trail settings in QuickBooks and be careful about condensing transaction in prior years. If an auditor perceives you are hiding something they tend to want to dig a little deeper. Be upfront with the auditor on what you are providing and not providing and why. Contrary to most public perceptions not all IRS agents are the devil reincarnated and will work with you in providing appropriate evidence to support your tax return.
It appears that the IRS is instructing its auditors to show some restraint in requesting full access to all data in taxpayer’s QuickBooks file. However, it is clear that this is the direction of audits in the future and you should be aware of its potential impact on your business. This audit technique is in its infancy and will be updated by the IRS through official releases and by court rulings. In the meantime you should use common sense in what is being put into QuickBooks and how it relates to your tax return.

2012-02-15T08:30:00.000-05:00