Davidson Fox & Company LLP  

July 2024 Newsletter



OUR OFFICES ARE CLOSED THE FIRST WEEK IN JULY

As summer kicks into high gear this month, our focus remains steadfast on strategic tax management and planning. In this edition of our newsletter, we examine several pertinent topics including the importance of living below your means as a cornerstone for entrepreneurial success, and unraveling the effects of political donations on your tax liabilities.

*Please note that our offices will be closed for our summer break from July 1st to July 5th.  We apologize for any inconvenience this may cause and eagerly anticipate reconnecting with you when we reopen on July 8th.

On June 5th, we had the pleasure of participating in the 27th Annual Chamber Classic Golf Tournament at Conklin Players Club.  It was a fantastic opportunity to enjoy the picturesque golf course, reconnect with friends, and network with fellow professionals in our community.  Meeting some of the region's top business leaders was invaluable, and we're grateful for the relationships we established throughout the day.  Davidson Fox proudly served as both the Beverage and Cigar sponsor, contributing to the tournament's success and making it a truly memorable day.  

 

The Dick's Open proved to be a resounding success, featuring thrilling golf matches, an electrifying concert by Luke Bryan, and the opportunity to bask in the beautiful (albeit hot) weather!

 

Upcoming July Fun -

July Fest 12th, 13th, 14th - Check out July Fest Binghamton 2024!  Experience the ultimate music celebration in downtown Binghamton with exciting new events designed to delight vendors and guests alike!  If you're a fan of music and jazz festivals, this is an event you simply can't afford to miss.

Mom's House Golf Tournament - taking place at Hiawatha this year with a 1pm shotgun start!

Continued vigilance in your financial strategies is essential, especially as the year progresses. We encourage you to reach out if you're contemplating any significant financial decisions or if you simply wish to discuss potential strategies for enhancing your financial well-being.

Our team is here to support you, your colleagues, family, and friends. We remain dedicated to seeking out and utilizing new opportunities to ensure our clients' prosperity. As always, we value your feedback and referrals highly.

 


Davidson Fox




July 2024 Individual Due Dates

July 1 - Time for a Mid-Year Tax Check Up

Time to review your 2024 year-to-date income and expenses to ensure estimated tax payments and withholding are adequate to avoid underpayment penalties.

July 10 - Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during June, you are required to report them to your employer on IRS Form 4070 no later than July 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

Weekends & Holidays:

If a due date falls on a Saturday, Sunday or legal holiday, the due date is automatically extended until the next business day that is not itself a legal holiday. 

Disaster Area Extensions:

Please note that when a geographical area is designated as a disaster area, due dates will be extended. For more information whether an area has been designated a disaster area and the filing extension dates visit the following websites:

FEMA: https://www.fema.gov/disaster/declarations
IRS: https://www.irs.gov/newsroom/tax-relief-in-disaster-situations







July 2024 Business Due Dates

July 1 - Self-Employed Individuals with Pension Plans

If you have a pension or profit-sharing plan, you may need to file a Form 5500 or 5500-EZ for the calendar year 2023. Even though the forms do not need to be filed until July 31, you should contact this office now to see if you have a filing requirement, and if you do, allow time to prepare the return.

July 15 - Non-Payroll Withholding

If the monthly deposit rule applies, deposit the tax for payments in June.

July 15 - Social Security, Medicare and Withheld Income Tax

If the monthly deposit rule applies, deposit the tax for payments in June.

July 31 -  Self-Employed Individuals with Pension Plans 

If you have a pension or profit-sharing plan, this is the final due date for filing Form 5500 or 5500-EZ for calendar year 2023.

July 31 - Social Security, Medicare and Withheld Income Tax

File Form 941 for the second quarter of 2024. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until August 12 to file the return.

July 31 - Certain Small Employers

Deposit any undeposited tax if your tax liability is $2,500 or more for 2024 but less than $2,500 for the second quarter.

July 31 - Federal Unemployment Tax

Deposit the tax owed through June if more than $500.

July 31 - All Employers

If you maintain an employee benefit plan, such as a pension, profit-sharing, or stock bonus plan, file Form 5500 or 5500-EZ for calendar year 2023. If you use a fiscal year as your plan year, file the form by the last day of the seventh month after the plan year ends.

Weekends & Holidays:

If a due date falls on a Saturday, Sunday or legal holiday, the due date is automatically extended until the next business day that is not itself a legal holiday.

Disaster Area Extensions:

Please note that when a geographical area is designated as a disaster area, due dates will be extended. For more information whether an area has been designated a disaster area and the filing extension dates visit the following websites:

FEMA: https://www.fema.gov/disaster/declarations
IRS: https://www.irs.gov/newsroom/tax-relief-in-disaster-situations




How an Accounting Pro Can Help You Create and Stick to a Budget

Maintaining a clear and effective budget is crucial for success. Yet, many businesses are overwhelmed by day-to-day operations, often making financial decisions without a solid forecast. This can lead to unexpected financial troubles and missed growth opportunities. As accounting professionals, we understand the challenges you face. We are here to offer insights on how a well-structured budget, crafted with the help of an accounting expert, can be your roadmap to financial stability and success.

The Importance of Budgeting

Budgeting is more than just a financial exercise; it's a strategic tool that helps you plan for the future, allocate resources efficiently, and make informed decisions. A well-crafted budget provides a clear picture of your financial health, highlighting areas where you can cut costs, invest more, or adjust your strategies. It acts as a financial blueprint, guiding your business toward its goals while ensuring you stay on track.

However, creating and sticking to a budget can be daunting, especially when juggling multiple responsibilities. This is where the expertise of an accounting expert becomes invaluable.

Creating Realistic Budgets

One of the primary roles of an accounting expert is to help you create a realistic budget that aligns with your business goals. Here's how we do it:

  1. Understanding Your Financial Landscape: We start by analyzing your current financial situation, including income, expenses, debts, and assets. This comprehensive overview allows us to identify patterns and areas that need attention.

  2. Setting Achievable Goals: Based on your financial analysis, we help you set realistic financial goals. Whether it's increasing revenue, reducing costs, or saving for future investments, having clear objectives is essential for effective budgeting.

  3. Forecasting and Planning: Using historical data and market trends, we create financial forecasts that predict future income and expenses. This helps you anticipate potential challenges and opportunities, allowing you to make proactive decisions.

  4. Allocating Resources: We assist in allocating resources efficiently, ensuring that every dollar is spent wisely. This includes prioritizing essential expenses, identifying areas for cost-cutting, and planning for unexpected costs.

Examples of How Budgets Work

To illustrate the power of budgeting, let's consider a few examples:

  1. Small Business Expansion: Imagine a small retail business looking to expand its operations by opening a new store. Without a budget, the business might overspend on the new location, leading to cash flow issues. By working with an accounting expert, the business can create a detailed budget that includes projected costs for the new store, anticipated revenue, and a timeline for profitability. This budget helps the business allocate funds appropriately, avoid overspending, and ensure a smooth expansion.

  2. Seasonal Business Planning: A landscaping company experiences fluctuating income throughout the year, with peak seasons in spring and summer. With a budget, the company can manage cash flow during the off-season. An accounting expert can help create a budget that accounts for seasonal variations, setting aside funds during peak months to cover expenses during slower periods. This approach ensures the business remains financially stable year-round.

  3. Cost Reduction Strategy: A manufacturing company notices that its operating expenses are steadily increasing, impacting profitability. By analyzing the company's financial data, an accounting expert identifies areas where costs can be reduced, such as renegotiating supplier contracts or optimizing production processes. The accounting expert then creates a budget that reflects these cost-saving measures, helping the company improve its bottom line.

Types of Budgeting

Different types of budgeting can be employed depending on the specific needs and circumstances of your business:

  1. Zero-Based Budgeting: This method starts from scratch each period, with every expense needing justification. It's particularly useful for businesses in financial distress or those looking to re-evaluate their spending habits.

  2. Static or Incremental-Based Budgeting: This approach uses historical data to add or subtract a percentage from the previous period's budget. It's straightforward and works well for stable businesses with predictable expenses.

  3. Performance-Based Budgeting: This method emphasizes the cash flow per unit of product or service, making it ideal for businesses focused on efficiency and productivity.

  4. Activity-Based Budgeting: This method works backward from the company's goals to determine the cost of attaining them. It's beneficial for businesses with clear, goal-oriented strategies.

  5. Value Proposition Budgeting: This approach assumes no line item should be included in the budget unless it directly provides value to the organization. It's a stringent method that ensures every dollar spent contributes to the company's objectives.

Monitoring Financial Performance

Creating a budget is just the first step; sticking to it requires ongoing monitoring and adjustments. An accounting expert plays a crucial role in this process by:

  1. Regular Financial Reviews: We conduct regular financial reviews to compare actual performance against the budget. This helps identify variances and understand the reasons behind them, allowing for timely adjustments.

  2. Cash Flow Management: Effective cash flow management is vital for business sustainability. We monitor your cash flow to ensure you have enough liquidity to meet your obligations and take advantage of growth opportunities.

  3. Financial Reporting: We provide detailed financial reports that offer insights into your business's financial health. These reports help you make informed decisions and stay on track with your budget.

  4. Advisory Services: Beyond numbers, we offer strategic advice to help you navigate financial challenges and seize opportunities. Our goal is to empower you with the knowledge and tools needed to achieve long-term success.

The Discipline to Get Started

Sometimes, all it takes to get started is a bit of discipline and the right guidance. As your accounting partner, we provide the structure and support needed to implement and maintain a successful budget. We understand that running a business is demanding, and financial management can often take a backseat. That's why we're here to take that burden off your shoulders, allowing you to focus on what you do best—growing your business.

How the Advice of an Accounting Professional Benefits You

The guidance of an accounting professional extends beyond just creating a budget. Here are additional ways their expertise can benefit your business:

  1. Strategic Financial Planning: Accounting experts help you develop long-term financial strategies that align with your business goals. This includes planning for major investments, expansions, and other significant financial decisions.

  2. Tax Optimization: An accounting expert can identify tax-saving opportunities and ensure compliance with tax regulations, potentially saving your business a substantial amount of money.

  3. Risk Management: Accounting experts assess financial risks and develop strategies to mitigate them. This includes managing debt, ensuring adequate insurance coverage, and preparing for economic downturns.

  4. Performance Metrics: By establishing key performance indicators (KPIs), accounting experts help you measure and track your business's financial performance. This data-driven approach enables you to make informed decisions and adjust strategies as needed.

  5. Technology Integration: Accounting experts can recommend and implement financial software and tools that streamline accounting processes, improve accuracy, and enhance financial reporting.

  6. Regulatory Compliance: Staying compliant with financial regulations is crucial for avoiding legal issues and penalties. Accounting experts ensure your business adheres to all relevant laws and standards.

  7. Financial Education: Accounting experts educate business owners and managers on financial best practices, empowering them to make better financial decisions and understand the implications of their actions.

Budgeting is a powerful tool that can drive your business towards financial success. With the expertise of an accounting expert, you can create a realistic budget, monitor your financial performance, and make informed decisions that align with your business goals. Don't let the complexities of budgeting hold you back. Take the first step towards financial stability and growth by partnering with a professional who understands your needs.

Next Steps

Ready to take control of your finances and set your business on the path to success? Contact our office today to schedule a consultation. Let us help you create a budget that works for you and provides the financial clarity you need to thrive. Together, we can build a stronger financial future for your business.


Avoid the Trap: Smart Strategies to Prevent Costly Penalties from Underpaying Estimated Taxes

Article Highlights:

  • Understanding Underpayment Penalties
  • De Minimis Exception
  • Safe Harbor Payments
  • Payment Timing
  • Withholding
  • Annualized Payments
  • Farmers and Fishermen

Underpayment penalties are a common concern for taxpayers, and many are unaware of how substantial they can be. These penalties are assessed by the Internal Revenue Service (IRS) when taxpayers fail to pay enough of their tax liability through withholding or estimated tax payments throughout the tax year. The interest rate for underpayments has been 8% per year, compounded daily, since October 1, 2023 and at least through June 30, 2024. That is up from 3% just two or three years ago.

Understanding underpayment penalties and the strategies to avoid them can save you from unnecessary financial stress and penalties. This article will delve into the intricacies of underpayment penalties and offer guidance on how to navigate these waters effectively.

Understanding Underpayment Penalties - Underpayment penalties are essentially the IRS's way of ensuring that taxpayers are paying their taxes on a quarterly basis rather than waiting until the tax filing deadline. The IRS requires that you pay at least 90% of your current year's tax liability or 100% of the tax shown on your return for the previous year (110% if you're considered a higher-income taxpayer) throughout the year. If you fail to meet these thresholds, you may be subject to the underpayment penalty. Think of it this way: the IRS is effectively charging you interest on the tax money you kept instead of sending it to the government.

The penalty is calculated on a quarterly basis, meaning that if you underpaid in any given quarter, you might be penalized for that quarter even if you overpaid in another. The rate of the penalty is determined by the IRS and can vary from quarter to quarter. For self-employed individuals or those without sufficient withholding, estimated tax payments are a critical tool in managing tax liability and avoiding underpayment penalties. You would think that a quarter of the year would be 3 months, but for the purpose of this calculation, the "quarters" are uneven and cover January — March (3 months), April and May (2 months), June, July and August (3 months) and finally the last 4 months of the year.

De Minimis Exception - The de minimis exception is one way to avoid underpayment penalties. If your total tax liability minus your withholdings and tax credits is less than $1,000, you won't be subject to underpayment penalties. This rule is particularly beneficial for taxpayers who have a relatively small tax liability.

Safe Harbor Payments - Safe harbor payments are essentially benchmarks set by the IRS that, if met, protect taxpayers from underpayment penalties, regardless of their actual tax liability for the year. These benchmarks are designed to ensure that taxpayers pre-pay a minimum amount of their tax obligation throughout the year, either through withholding or estimated tax payments.

The general rule for safe harbor payments requires taxpayers to prepay the lesser of 90% of the current year's tax or 100% of the previous year's tax. However, for those with an adjusted gross income (AGI) over $150,000 ($75,000 if married filing separately), the rules tighten. These individuals must pay the lesser of 90% of the current year's tax or 110% of the previous year's tax to qualify for this safe harbor. Thus, the safe harbor that works for any eventuality is 110% of the previous year's tax liability. In addition, if you had no tax liability in the prior year, then you are exempt from an underpayment penalty.  

Since these pre-payments consist of both withholding and estimated tax payments, the timing of these payments is also critical for payments to qualify for the safe harbor penalty exception. Estimated tax payments are due in four installments: April 15, June 15, September 15, and January 15 of the following year, approximately 2 weeks after the end of the "quarters" noted above. If any of these dates falls on a Saturday, Sunday, or legal holiday, the due date will be the next business day. Caution: Some states have different estimated payments dates and, in some cases, amounts for state estimated payments.    

Withholding - Unlike estimated payments, withholding is considered paid evenly throughout the year, regardless of when it occurs. This can be particularly useful for taxpayers who realize they may fall short of their safe harbor requirements as the year progresses and boost their withholding by one means or another depending upon the increase required.

  • An employee can increase their withholding for the balance of the year by providing their employer with a modified W-4 form that will cause the employer to increase withholding for the balance of the year.

  • Where the increased withholding need is discovered closer to the end of the year, a cooperative employer might be willing to withhold a lump sum amount. 

  • 10% is the default withholding rate for nonperiodic withdrawals from traditional IRA accounts when you fail to provide a Form W-4R to the payer that indicates your desired withholding rate (0% - 100%). Thus by submitting a Form W-4R, or a revised one, to the payer of the IRA, requesting a higher withholding rate, additional withholding can be achieved. Where you are not employed (or even if you are), you can create more tax withholding by taking a distribution and then rolling the distribution amount back into the traditional IRA or a qualified retirement plan within the statutory 60-day time frame. To achieve this strategy you will need to make up for the withholding with other funds when making the rollover and make sure you did not have another rollover in the prior 12 months since taxpayers are only allowed one IRA rollover in a 12-month period. 

  • Form W-4R is also used to advise payers of an eligible rollover distribution from an employer retirement plan of the desired withholding rate if it is other than the default rate of 20%. 

  • Form W-4P should be completed to have payers withhold the correct amount of federal income tax from the taxable portion of a periodic pension, annuity (including commercial annuities), profit-sharing and stock bonus plan, or IRA payments. Periodic payments are made in installments at regular intervals (for example, annually, quarterly, or monthly) over a period of more than 1 year.  

Calculating the Penalty — If you file your return, owe more than $1,000 and don't meet an exception, the IRS will compute the underpayment penalty and bill you for it. However, IRS Form 2210 (2210-F for farmers and fishers) can be used to calculate the required annual payment and determine if you have underpaid in any quarter of the tax year. The form considers the amount of tax owed, estimated tax payments made, and any withholding. It then calculates the penalty based on the underpayment for each quarter until the due date of the tax return or until the underpayment is paid, whichever comes first.

If your income varies significantly throughout the year, the annualized income installment method can help reduce or eliminate underpayment penalties. This method allows you to calculate your tax liability and corresponding estimated payments based on your actual income for each quarter, rather than assuming an even income distribution throughout the year.

Farmers and Fishermen - There are special estimated tax requirements for farmers and fishermen. Farmers and fishermen, with at least two-thirds of their gross income for the prior year or the current year from farming or fishing, have two options:

  • They may pay all their estimated tax by January 15th (which is the 4th quarter due date for estimated taxes), or

  • They can file their tax return on or before March 1st and pay the total tax due at that time.

The required estimated tax payment for farmers and fishermen is the lesser of:

  • 66 2/3% of the current year's tax, or

  • 100% of the prior year's tax.

These provisions are designed to accommodate the unique income patterns of farmers and fishermen, who may not have steady income throughout the year and often realize the bulk of their income at specific times of the year.

Navigating the complexities of underpayment penalties requires a proactive approach to tax planning and payment. By understanding the rules and utilizing strategies such as adjusting withholdings, making estimated tax payments, and taking advantage of the safe harbor rule and the de minimis exception, taxpayers can avoid the financial sting of underpayment penalties. Remember, the goal is to manage your tax liability throughout the year effectively, so you're not caught off guard come tax season.

If you're unsure about your tax situation, please contact this office for personalized advice and peace of mind.


Unlock Hidden Savings: A Guide to Maximizing Tax Deductions for Small Business Owners

Article Highlights:

  • Maximize Expenses
  • New Businesses
  • Legal and Professional Fees
  • Spousal Joint Ventures
  • Self-Employed Health Insurance
  • Self-Employed (SE) Tax Deduction
  • Insurance
  • Home Office 
  • Qualified Business Income Deduction
  • Advertising Expenses 
  • Website Costs
  • Financing
  • Vehicle Expenses 
  • Meal Deductions
  • Entertainment
  • Deducting the Cost of Business Supplies and Equipment
  • Pension Plans
  • Pension Start-Up Credit
  • Employee Payroll
  • Hiring Your Children
  • Research Credit
  • Accounting and Bookkeeping Fees
  • Effects of TCJA Sunsetting After 2025

As a small business owner, one of your primary goals should be to maximize your business deductions to minimize your tax liability. Effective tax planning can significantly impact your bottom line, allowing you to reinvest more into your business. This comprehensive guide will cover various strategies and deductions available to small business owners, including those related to new businesses, legal and professional fees, spousal joint ventures, self-employed health insurance, home offices, business equipment, advertising expenses, website costs, financing, vehicle expenses, entertainment, depreciation, material and supply expensing, de minimis safe harbor expensing, routine maintenance, bonus depreciation, Section 179 expensing, business meals, the qualified business income deduction, and the effects of the Tax Cuts and Jobs Act (TCJA) sunsetting after 2025.

New Businesses - Starting a new business involves various costs, many of which can be deducted to reduce your taxable income. Normally, the costs of starting a business must be amortized (deducted ratably) over 15 years. However, you can elect to deduct up to $5,000 of start-up expenses and $5,000 of organizational expenses in the first year. Qualified start-up costs include:

  • Surveys/analyses of potential markets, labor supply, products, transportation facilities, etc. 

  • Wages paid to employees, and their instructors, while they are being trained.

  • Advertisements related to opening the business. 

  • Fees and salaries paid to consultants or others for professional services; and

  • Travel and related costs to secure prospective customers, distributors and suppliers.

Each of the $5,000 amounts is reduced by the amount by which the total start-up expenses or organizational expenses exceeds $50,000. Expenses not deductible in the first year of the business must be amortized over 15 years.

Legal and Professional Fees - Legal and professional fees incurred in setting up your business fall under the organizational expense first year deduction of $5,000 and the balance would be amortized over 15 years. After your business is operational, these fees can be expensed as they are incurred. This includes costs for legal advice, accounting services, and consulting fees, which are essential for maintaining compliance and optimizing business operations.

Spousal Joint Ventures - For married couples running an unincorporated business together, it's common but incorrect to report all income as one spouse's sole proprietorship. Instead, you should consider a spousal joint venture, allowing both spouses to report income and expenses on separate Schedule C forms. This approach enables both spouses to accumulate Social Security benefits and contribute to retirement accounts.

In addition, to claim a childcare credit, both spouses on a joint return must have earned income (or imputed income if one of the spouses is a full-time student or is disabled), so unless the non-Schedule C spouse has another source of earned income, the couple would not be allowed a childcare credit. There are two ways to remedy this situation, either: (1) by establishing a partnership or (2) a joint venture (each spouse files a Schedule C with their share of the income, deductions, and credits).

Self-Employed (SE) Health Insurance – Rather than deducting health insurance as an itemized deduction medical expense subject to the 7.5% of AGI reduction, self-employed individuals can deduct 100% of health insurance premiums for themselves, their spouses, and dependents above the line, reducing your adjusted gross income (AGI) and potentially qualifying you for other tax benefits. However, this deduction is limited to the net income of the business. The deduction for SE health insurance is allowed even if the self-employed individual uses the standard deduction rather than itemizing deductions on Schedule A.

Self-Employment Tax Deduction – Sole proprietors with more than a minimal amount of profit from their business are required to pay self-employment tax (their contribution to the Social Security and Medicare programs, like the payroll taxes of employees). There is a deduction element to this tax. As a self-employed individual you may deduct 50% of your SE tax liability for the tax year. Like the self-employed health insurance deduction, the SE tax deduction is claimed as an above-the-line-deduction in computing adjusted gross income (AGI). You do not need to itemize deductions to claim the deduction.

Insurance - A range of insurance premiums are deductible for sole proprietors, if they are deemed necessary and ordinary for your business operations. This includes health insurance, liability insurance, property insurance, and auto insurance for vehicles used in your business.

Home Office - Small business owners may qualify for a home-office deduction, which will help them save money on their taxes and benefit their bottom line. Taxpayers can generally take this deduction if they use a portion of their home exclusively for their business and on a regular basis. Plus, this deduction is available to both homeowners and renters. There are two methods to determine the amount of a home-office deduction:

  • Actual-Expense Method – The actual-expense method prorates home expenses based on the portion of the home that qualifies as a home office, which is generally based on square footage. Aside from prorated expenses, 100% of directly related costs, such as painting and repair expenses specific to the office, can be deducted. Unlike the simplified method, the business-use percentage for the calculation is not limited to 300 square feet.

  • Simplified Method – The simplified method allows for a deduction equal to $5 per square foot of the home used for business, up to a maximum of 300 square feet, resulting in a maximum simplified deduction of $1,500.

A taxpayer may elect to take the simplified method or the actual-expense method (also referred to as the regular method) on an annual basis. Thus, a taxpayer may freely switch between the two methods each year. In addition, when using the simplified method, the taxpayer need not account for the home office depreciation when computing the gain when and if the home is sold.

Additional office expenses such as utilities, insurance, office maintenance, etc., are not allowed when the simplified method is used. Prorated rent or home interest and taxes are not either, although 100% of home interest and taxes are deductible as non-business expenses if the taxpayer itemizes deductions.

Qualified Business Income Deduction - The TCJA introduced the Qualified Business Income (QBI) deduction, allowing eligible pass-through entities to deduct up to 20% of their qualified business income. This deduction is subject to various limitations and phase-outs based on income levels and business types. Proper planning is essential to maximize this valuable deduction.

Advertising Expenses - Once the business is operating, all forms of advertising are generally currently deductible expenses, including promotional materials such as business cards, digital or print advertisements, and other forms of advertising. However, any advertising expense incurred before a business begins functioning would be treated as a start-up expense. Trade shows are a form of advertising, and if a business purchases their own custom trade show booth, that booth can generally be totally or mostly expensed in the year purchased using bonus depreciation or Sec 179 expensing.

Website Costs - Website development and maintenance costs are deductible as business expenses. Initial development costs can be amortized over three years, while ongoing maintenance and updates can be expensed in the year incurred. A well-maintained website is crucial for attracting and retaining customers in the digital age.

Financing - Interest on business loans is deductible, reducing your taxable income. This includes interest on loans for purchasing equipment, real estate, or other business needs. Properly managing your business financing can optimize cash flow and support growth initiatives.

But be careful not to mix personal and business interest expenses. Banks are usually reluctant to lend money on a startup business. However, an equity loan on your home will generally achieve a lower interest rate anyway, and the interest can be traced to and deductible as business interest.

Vehicle Expenses - If you use your car for business purposes you can deduct its business use by using either the standard mileage method, which allows a per mile amount, or the actual expense method. However, both methods require that you track your business and total mileage for the year. If using the standard mileage method, you need to know the number of business miles driven, and if using the actual method, you will need to prorate the actual operating expenses including fuel, insurance, repairs, and depreciation by the percentage of business miles to total miles. You can also deduct tolls and parking fees with either method.

  • Record Keeping - Both the standard mileage and the actual expense methods offer unique advantages and requirements, but one common thread is the necessity of meticulous record keeping. To claim the standard mileage rate, you must be able to substantiate the business use of your vehicle. This means keeping a detailed log of each trip, including the date, destination, purpose, and miles driven.

  • Business vs. Personal Use - If you use your vehicle for both business and personal purposes, you must allocate expenses based on the percentage of business use. Accurate records of both business and personal mileage are essential to calculate this percentage correctly.

In the event of an IRS audit, your mileage log serves as evidence to support your deduction claims. Without proper records, you risk having your deductions disallowed, which could result in additional taxes, penalties, and interest.

Meal Deductions - Meal expenses are deductible under certain conditions. These expenses must be ordinary and necessary for carrying on a trade or business, and not lavish or extravagant under the circumstances. However, the percentage of a qualified business meal that is deductible has varied in recent years.

  • Prior to 2021 - Businesses were only allowed to deduct 50% of the cost of a qualified meal.

  • 2021 and 2022 - In response to the COVID-19 pandemic, the Consolidated Appropriations Act, 2021, introduced a temporary provision allowing a 100% deduction for business meals provided by restaurants. The aim was to support the struggling restaurant industry by encouraging businesses to spend more on qualified meals.

  • After 2022, the allowable deduction has reverted to 50% of the cost of a qualified meal.

Qualified meal deductions are basically in two categories, business meals and away from home meals:

  • Business Meals - The taxpayer or an employee must be present at the meal. Additionally, the meal must be provided to a current or potential business customer, client, consultant, or similar business contact.

  • Away From Home Meals - When there is travel away from home on business, the traveler may deduct 50% of the cost of their own meals. For instance, if a self-employed individual goes on a business trip and incurs meal expenses, they can deduct 50% of those costs. If they dine with a business contact, they can also deduct 50% of the cost of the contact's meal. The temporary 100% deduction for restaurant-provided meals in 2021 and 2022 also applied to away-from-home meals.

Instead of actual meal costs, self-employed individuals can use an optional rate method, also called the standard meal allowance, in effect for the year, with the rate generally higher for major cities, resort areas and other locations in the U.S. The per diem rates for 2024 range from a low of $59 to $79. The applicable rates can be found at the following web site: www.gsa.gov/perdiem

  • Recordkeeping and Compliance - To claim business meal deductions, taxpayers must maintain detailed records. This includes keeping receipts, invoices, or other documentation that substantiates the expense. The IRS requires that the records clearly indicate the amount, date, location, and business purpose of the meal, as well as the identities of the individuals involved.

  • Entertainment - The Tax Cuts & Jobs Act (TCJA) essentially eliminated the deduction for most entertainment expenses, but you can still deduct 50% of business meals if they are directly related to your business. This includes meals with clients, prospects, and employees. Proper documentation is essential to substantiate these deductions.

Away From Home Lodging Expenses - Self-employed individuals are not entitled to use the federal per diem rates to substantiate lodging expenses under any circumstances. There is no optional standard lodging amount like the standard meal allowance. The allowable lodging expense deduction is the taxpayer’s actual cost as documented by receipts.

Deducting the Cost of Business Supplies and Equipment - From time to time, an owner of a small business will purchase equipment, office furnishings, vehicles, computer systems and other items for use in the business. How to deduct the cost for tax purposes is not always an easy decision because there are several options available, and the decision will depend upon whether a big deduction is needed for the acquisition year or more benefit can be obtained by deducting the expense over several years using depreciation. The following are the write-off options currently available.

  • Material & Supply Expensing – IRS regulations allow certain materials and supplies that cost $200 or less, or that have a useful life of less than one year, to be expensed (deducted fully in one year) rather than depreciated. This simplifies accounting and provides immediate tax benefits for necessary business purchases.

  • De Minimis Safe Harbor Expensing - The de minimis safe harbor rule allows businesses to expense purchases up to $2,500 per item or invoice, or $5,000 if the business has an applicable financial statement. This rule simplifies record-keeping and provides flexibility in managing smaller capital expenditures.

  • Routine Maintenance – IRS regulations allow a deduction for expenditures used to keep a unit of property in operating condition where a business expects to perform the maintenance twice during the class life of the property. Class life is different than depreciable life. Here are examples of the class life and depreciable life differences for some items commonly used in business:

    Depreciable Item
    Class Life
    Depreciable Life
    Office Furnishings
    10
    7
    Information Systems
    6
    5
    Computers
    6
    5
    Autos & Taxis
    3
    5
    Light Trucks
    4
    5
    Heavy Trucks
    6
    5

  • Depreciation – Depreciation is the normal accounting way of writing off business capital purchases by spreading the deduction of the cost over several years. The IRS regulations specify the number of years for the write-off based on established asset categories, and generally for small business purchases the categories include 3-, 5- or 7-year write-offs. The 5-year category includes autos, small trucks, computers, copiers, and certain technological and research equipment, while the 7-year category includes office fixtures, furniture and equipment. The cost of nonresidential real property (buildings) used in business is depreciated over 39 years.

  • Bonus Depreciation – The tax code provides for a first-year bonus depreciation that allows a business to deduct 100% of the cost of most new or used tangible property if it is placed in service during 2022. This provides a larger first-year depreciation deduction for the item. Bonus depreciation is a temporary provision and for eligible business property bought after 2022, the rates drop to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and nothing after 2026. When the bonus depreciation rate is less than 100%, the difference between the cost of the item and the bonus write-off amount is eligible for regular depreciation.

  • Sec 179 Expensing – Another option provided by the tax code is an expensing provision for small businesses that allows a certain amount of the cost of tangible equipment purchases to be expensed in the year the property is first placed into business service. This tax provision is commonly referred to as Sec. 179 expensing, named after the tax code section that sanctions it. The expensing is limited to an annual inflation adjusted amount, which is $1,220,000 ($610,000 for taxpayers filing as married separate) for 2024. To ensure that this provision is limited to small businesses, whenever a business has purchases of property eligible for Sec 179 treatment that exceed the year’s investment limit ($3,050,000 for 2024), the annual expensing allowance is reduced by one dollar for each dollar the investment limit is exceeded.

    An undesirable consequence of using Sec. 179 expensing occurs when the item is disposed of before the end of its normal depreciable life. In that case, the difference between normal depreciation and the Sec. 179 deduction is recaptured and added to income in the year of disposition.

  • Mixing Bonus and Section 179 Expensing - Businesses can combine bonus depreciation, regular depreciation, and Section 179 expensing to maximize deductions. This flexibility allows businesses to tailor their tax strategy to their specific needs, optimizing cash flow and tax savings.

  • Pension Plans - Contributions to retirement plans, such as SEP IRAs or solo 401(k)s, are deductible. These plans allow for significant contributions, reducing taxable income while saving for retirement. For example, in 2024, the contribution limit for a SEP IRA is up to 25% of compensation (20% of the net business profit) or $69,000, whichever is less. If you have employees, your contributions to their retirement plans are deductible from your business income. However, your contributions to your own plan, while deductible from your adjusted gross income, are not an expense of your self-employment business.

  • Pension Start-Up Credit - Where a small employer does not already have a pension plan, there is a tax credit for the costs of establishing a retirement plan, up to $500 per year per eligible employee for the first three years of the plan, maximum $5,000 per year. This can include setup and administrative costs.

  • Employee Payroll - Wages paid to employees, including salaries, bonuses, commissions, and certain fringe benefits, are deductible business expenses. This encompasses all forms of compensation given to an employee for services performed, regardless of how the compensation is measured or paid. In addition. employers can also deduct the costs associated with payroll taxes. These taxes include the employer's share of Social Security and Medicare taxes, federal unemployment taxes (FUTA), and state unemployment taxes.

  • Hiring Your Children – Where they can provide meaning services, hiring your children can be a smart move for both your business and your family. Not only does it provide your children with valuable work experience and instill a strong work ethic, but it also offers significant tax advantages. By employing your children, you can shift income from your higher tax bracket to their lower one, potentially reducing your taxable income and saving on taxes.

  • Research Credit - The Research and Development (R&D) Tax Credit allows businesses to deduct expenses related to research and development activities. This can include wages, supplies, and contract research expenses. For a sole proprietor developing a new product, the costs associated with design, testing, and prototyping could be eligible for this credit.

  • Accountant and Bookkeeping Fees - Including those related to tax preparation, payroll services, bookkeeping and other financial management activities, are generally deductible expenses for businesses. These costs are considered necessary and ordinary expenses incurred in the operation of a business.

  • It's important for business owners to maintain detailed records of these expenses to substantiate their deductions during tax filing. Consulting with a tax professional can provide further insights into how to maximize these deductions while adhering to the IRS guidelines.

Effects of TCJA Sunsetting After 2025 - Many provisions of the TCJA, including the QBI deduction and increased bonus depreciation, are set to expire after 2025. Business owners should be aware of these changes and plan accordingly. Strategies may include accelerating deductions and income recognition to take advantage of current tax benefits before they expire.

Maximizing business deductions requires careful planning and a thorough understanding of the tax code. By leveraging available deductions and credits, small business owners can significantly reduce their tax liability and reinvest savings into their business.

Please contact this office to ensure compliance with the latest tax laws and to tailor these strategies to your specific business situation. With the right approach, you can turn tax season from a time of stress into an opportunity for financial optimization.


Unlock the Secrets: How Political Donations Can Impact Your Taxes

Article Highlights

  • Understanding Political Donations
  • Donating Time and Out of Pocket Expenses
  • Tax Treatment of Political Donations
  • Reporting and Disclosure Requirements
  • Gift Tax Issues
  • PAC Reporting
  • Charitable Contributions vs. Political Donations
  • Strategies for Tax-Efficient Political Giving

In the intricate world of tax law, political donations occupy a unique space, blending civic engagement with financial implications. As taxpayers consider supporting their preferred political causes or candidates, understanding the tax aspects of these contributions is crucial. This article delves into the tax treatment of political donations, the distinctions between charitable contributions and political donations, and strategies for tax-efficient political giving.

Understanding Political Donations - Political donations can be made to a variety of entities, including political candidates, political parties, political action committees (PACs), and 527 organizations. Each of these entities plays a distinct role in the political landscape, but from a tax perspective, they share a common trait: contributions to them are generally not tax-deductible on federal tax returns.

Donating time or effort to a political campaign, political candidate, political action committee (PAC), or any group that seeks to influence legislation, is also not a tax-deductible expense. Also not deductible are out-of-pocket costs you incur assisting these groups.

In contrast, if you have out-of-pocket expenses related to volunteering for a qualified nonprofit charitable organization, those expenses are tax-deductible if you itemize your deductions.

Tax Treatment of Political Donations - The Internal Revenue Service (IRS) does not allow taxpayers to deduct political donations as charitable contributions. This is because the organizations that receive these donations do not qualify as charitable organizations under Section 501(c)(3) of the Internal Revenue Code. Instead, many political organizations are classified under Section 527, which includes political parties, candidates' campaign organizations, and political action committees.

The primary reason for the non-deductibility of political donations is the principle that tax deductions should not subsidize political activity. The tax code is designed to encourage donations to organizations that serve the public good in a non-partisan manner, such as charities, educational institutions, and religious organizations.

A few states allow a limited tax credit for political donations.

Reporting and Disclosure Requirements - While political donations are not tax-deductible, they are subject to reporting and disclosure requirements. For instance, federal law requires political campaigns and PACs to report the identities of donors who contribute more than a certain threshold amount. This transparency aims to prevent undue influence and ensure the integrity of the political process.

Additionally, individuals who make substantial donations to political organizations may need to file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return if their contributions exceed the annual exclusion for gift tax purposes. For 2024 the annual gift tax exclusion is $18,000, up from $17,000 in 2023. However, it's important to note that most individual political donations do not reach the threshold that would trigger gift tax reporting.

Charitable Contributions vs. Political Donations - It's essential to distinguish between charitable contributions and political donations. Charitable contributions are made to organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code. These donations are generally tax-deductible, subject to certain limitations based on the donor's adjusted gross income. In contrast, political donations, as previously mentioned, do not qualify for a tax deduction.

This distinction underscores the importance of verifying the tax-exempt status of any organization before donating, especially if the donor intends to claim a tax deduction. The IRS provides tools and resources for taxpayers to check the exempt status of organizations.

Strategies for Tax-Efficient Political Giving - While direct political donations are not tax-deductible, there are strategies for individuals to support political causes in a tax-efficient manner. One approach is to focus on charitable giving to organizations that align with one's political beliefs but maintain a non-partisan stance and qualify as 501(c)(3) entities. For example, donating to non-profit organizations that advocate for policy issues without directly supporting political candidates or parties can provide both societal impact and tax benefits.

Another strategy involves leveraging donor-advised funds (DAFs) for charitable contributions. Contribution to a donor advised fund is a way to warehouse funds in a year in which the donor has an unusually high income (and can benefit from a large charitable deduction) to satisfy the donor's social obligations to make charitable contributions in future years, without incurring the expense of setting up a private foundation and satisfying annual filing and other private foundation requirements.

While DAFs cannot be used to make direct political donations, they can support non-profit organizations engaged in policy research and education on issues of interest. Donors receive an immediate tax deduction for contributions to a DAF, and the funds can be distributed to qualifying charities over time.

If you have questions, please contact this office.

 


Get Those Kids a Job: The Tax Advantages of Securing Summer Jobs for Your Children

Article Highlights

  • Standard Deduction
  • IRA Options
  • Self-Employed Parent
  • Employing Your Child
  • Tax Benefits

Children who are dependents of their parents are subject to what is commonly referred to as the kiddie tax. This generally applies to children under the age of 19 and full-time students over the age of 18 and under the age of 24.

The kiddie tax originated many years ago as a means to close a tax loophole where parents would put their investments under their child’s name and social security number so that their investment income would be taxed at lower tax rates. Enter the kiddie tax, under which unearned income (investment income) more than a minimum amount is taxed at the parent’s highest marginal tax rate.

Tax-Free Income - On the bright side, a child’s earned income (income from working) is taxed at single rates, and the standard deduction for singles is $14,600 for 2024. This means that your child can make $14,600 from working and pay no income tax (but will be subject to Social Security and Medicare payroll taxes), and if the child is willing to contribute to a traditional IRA, for which the 2024 contribution cap is $7,000, the child can make $21,600 from working—federal income tax free.

Even if your child is reluctant to give up any of their hard-earned money from their summer or regular employment, if you, a grandparent, or others have the financial resources, the amount of an IRA contribution could be gifted to the child, giving your child a great start toward their retirement savings and hopefully a continuing incentive to save for their retirement.

Employing Your Child – If you are self-employed (an unincorporated business), a reasonable salary paid to your child reduces your self-employment (SE) income and your income tax by shifting income to the child.

For 2024, when a child under the age of 19 or a student under the age of 24 is claimed as a dependent of the parents, the child is generally subject to the kiddie tax rules if their investment income is upward of $2,600. Under these rules, the child’s investment income is taxed at the same rate as the parent’s top marginal rate using a lower $1,300 standard deduction. However, earned income (income from working) is taxed at the child’s marginal rate, and the earned income is reduced by the lesser of the earned income plus $400 or the regular standard deduction for the year, which is $14,600. If a child has no other income, the child could be paid $14,600 and incur no income tax. If the child is paid more, the next $11,600 he or she earns is taxed at 10%.

Example: You are in the 22% tax bracket and own an unincorporated business. You hire your child (who has no investment income) and pay the child $16,500 for the year. You reduce your income by $16,500, which saves you $3,630 of income tax (22% of $16,500), and your child has a taxable income of $1,900 ($16,500 less the $14,600 standard deduction) on which the tax is $190 (10% of $1,900). The net income tax saved by the family is $3,440 ($3,630 - $190).

If the business is unincorporated and the wages are paid to a child under age 18, he or she will not be subject to FICA – Social Security and Hospital Insurance (HI, aka Medicare) – taxes since employment for FICA tax purposes doesn’t include services performed by a child under the age of 18 while employed by a parent. Thus, the child will not be required to pay the employee’s share of the FICA taxes, and the business won’t have to pay its half either. In addition, by paying the child and thus reducing the business’s net income, the parent’s self-employment tax payable on net self-employment income is also reduced.

Example: Using the same circumstances as the example from above, and assuming your business profits are $180,000, by paying your child $16,500, you not only reduce your self-employment income for income tax purposes, but you also reduce your self-employment tax (HI portion) by $442 (2.9% of $16,500 times the SE factor of 92.35%). But if your net profits for the year were less than the maximum SE income ($168,600 for 2024) that is subject to Social Security tax, then the savings would include the 12.4% Social Security portion, $1,889 (12.4% of $16,500 x 92.35%), in addition to the 2.9% HI portion for a total savings of $2,331 ($442 + $1,889).

A similar but more liberal exemption applies for FUTA, which exempts from federal unemployment tax the earnings paid to a child under age 21 while employed by their parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of the child’s parents. However, the exemptions do not apply to businesses that are incorporated or a partnership that includes non-parent partners. Even so, there's no extra cost to your business if you're paying a child for work that you would pay someone else to do anyway.

Retirement Plan Savings - Additional savings are possible if the child is paid more and deposits the extra earnings into a traditional IRA. For 2024, the child can make a tax-deductible contribution of up to $7,000 to his or her own IRA. The business also may be able to provide the child with retirement plan benefits, depending on the type of plan it uses and its terms, the child's age, and the number of hours worked. By combining the standard deduction of $14,600 and the maximum deductible IRA contribution of $7,000 for 2024, a child could earn $21,600 of wages and pay no income tax.

However, referring back to our original example, the child’s tax to be saved by making a $7,000 traditional IRA contribution is only $190, so it might be appropriate to make a Roth IRA contribution instead, especially since the child has so many years before retirement and the future tax-free retirement benefits will far outweigh the current $190 savings.

If you have questions about the information provided here and other possible tax benefits or issues related to hiring your child, please give this office a call.

 

 


Think Twice Before Tossing: The Critical Timing for Disposing of Your Tax Records Safely

Article Highlights:

  • Why We Keep Records
    o   Audit Defense
    o   Amending Returns
    o   Claiming Refunds
    o   Tax Basis
  • Duration for Keeping Tax Records
    o   Federal Statute of Limitations on Tax Refunds
    o   Tax Return Omissions
    o   Indefinite Retention
    o   Financially Disabled
  • The Big Problem!
    o   Stock Acquisition Data
    o   Stock and Mutual Fund Statements
    o   Tangible Property Purchase and Improvement Records
  • The 10-Year Statute of Limitations on Collections

Now that your taxes are complete and filed for last year, you are probably wondering what old tax records can be discarded. If you are like most taxpayers, you have records from years ago that you are afraid to throw away. To determine how to proceed, it is helpful to understand why the records needed to be kept in the first place. Generally, we keep “tax” records for several reasons: 

Audit Defense: In the event of an IRS audit, taxpayers are required to present documentation supporting the claims made on their tax returns. Without proper records, defending against audit adjustments becomes significantly challenging.

Amending Returns: If taxpayers need to amend a return due to discovered errors or overlooked deductions, having detailed records makes the process smoother and ensures that all adjustments are accurate.

Claiming Refunds: For claiming refunds, especially those related to overpaid taxes, detailed records are necessary to substantiate the claim.

Tax Basis: When capital assets, such as stock, business assets, rentals and other investments are disposed of it is necessary to determine for tax purposes if there was a gain or loss from the transaction. The tax basis is what the asset cost plus or minus adjustments such as the cost of improvements which increase the tax basis, depreciation (reduces basis), casualty losses, or tax credits which decrease the tax basis. 

Duration for Keeping Tax Records - The general rule of thumb is to keep tax records until the statute of limitations for the tax return in question expires. The statute of limitations is the period during which the taxpayer can amend their tax return to claim a credit or refund, or the IRS can assess additional tax. 

Federal Statute of Limitations on Tax Refunds: The statute of limitations on tax refunds is a set of rules defined by the Internal Revenue Code that determines the time frame within which a taxpayer can claim a credit or refund for overpaid taxes. This statute serves two main purposes:

  • It specifies how long an individual has to file a claim for a refund or an amended return after the original return was filed or the tax was paid.

  • It sets limits on the amount of refund or credit that can be claimed, based on certain conditions.

    Some states have longer statutes, typically 4 years, so they have more time to piggyback on any federal audits and adjustments.

    Example: Sue filed her 2023 tax return before the due date of April 15, 2024. She will be able to safely dispose of most of her records after April 15, 2027. On the other hand, Don files his 2023 return on June 2, 2024. He needs to keep his records at least until June 2, 2027. In both cases, the taxpayers should keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day.

Tax Return Omissions: In certain situations, such as when a taxpayer does not report income that they should report, and it is more than 25% of the gross income shown on the return, the IRS suggests keeping records for six years.

Of course, the statute doesn’t begin running until a return has been filed. There is no limit on the assessment period where a taxpayer files a false or fraudulent return to evade tax.

Indefinite Retention: For records related to property, the IRS recommends keeping them for as long as the property is owned and for at least three years after filing the return reporting the sale or other disposition of the property. This is crucial for calculating depreciation, amortization, or gains or losses on the property.

Financially Disabled - Additionally, the time periods for claiming a refund are suspended for taxpayers who are "financially disabled". A taxpayer is financially disabled if they are unable to manage their financial affairs because of a medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months. For a joint income tax return, only one spouse need be financially disabled for the time to be suspended. However, a taxpayer is not treated as financially disabled during any period their spouse, or any other person, is authorized to act on their behalf in financial matters. 

The Big Problem! The problem with discarding records indiscriminately for a particular year once the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets such as stocks, bonds, and real estate. These documents need to be separated, and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Thus, it makes more sense to keep those records separated by asset. The following are examples of records that fall into this category: 

Stock Acquisition Data — If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed to prove the amount of profit (or loss) you had on the sale. And if the result of those sales, and sales of other capital assets, is a loss that you’ll be carrying forward to future tax returns – loss exceeds $3,000 ($1,500 if filing as married separate) – keep the purchase and sale records for four years after filing the return on which the last of the loss is used up.

Stock and Mutual Fund Statements — Many taxpayers use the dividends that they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gains when the stock is finally sold. Keep statements for at least four years after the final sale.

Tangible Property Purchase and Improvement Records — Keep records of home, investment, rental property or business property acquisitions, AND related capital improvements for at least four years after the underlying property is sold.

In addition, if you own a business that has a loss that creates a net operating loss (NOL) that you’ll be carrying forward to deduct in future years, you should keep all the business’s records that substantiate income and expenses from the loss year for at least four years after filing the return on which the NOL deduction is used up. 

The 10-Year Statute of Limitations on Collections – Although this has nothing to do with the theme of his article, “how long does the IRS have to collect unpaid tax?” is an often-asked question. The tax code puts a 10-year limit on the time period the IRS can pursue the collection of a tax debt. This statute of limitations begins from the date the tax was assessed and not from the tax year for which the debt was incurred. Understanding this limitation is crucial for taxpayers for several reasons: 

Collection Activities: The IRS has various collection activities at its disposal, including tax liens, levies, and wage garnishments. However, these activities are bound by the 10-year statute of limitations.

Installment Agreements: When a taxpayer owes federal tax and can’t immediately pay it, they may enter into an installment payment agreement with the IRS. In this case the clock on the 10-year statute does not stop. This means the IRS must collect the full amount owed within the original 10-year period unless specific conditions extend this period.

Have questions about whether to retain certain records? Give this office a call before tossing out those documents. It is better to be sure before discarding something that might be needed down the road.


How Becoming a Real Estate Professional Unlocks Tax Advantages for Landlords

Article Highlights:

  • Qualifications To Be a Real Estate Professional
    o   More than Half of Personal Services in Real Property Trades or Businesses
    o   Minimum of 750 Hours of Services
  • Tax Ramifications of Being a Real Estate Professional
    o   Treatment of Rental Real Estate Activities
    o    Material Participation and Record-Keeping
    o    Election to Aggregate Rental Real Estate Interests
    o    Closely Held C Corporations

In the complex world of real estate, understanding the tax implications of your professional status is crucial. The Internal Revenue Code has specific criteria that define a real estate professional, along with distinct tax rules that apply and which the Internal Revenue Service (IRS) is charged with enforcing. This article delves into the qualifications necessary to be recognized as a real estate professional for tax purposes and explores the significant tax ramifications associated with this designation.

Qualifications To Be a Real Estate Professional - To be considered a real estate professional by the IRS, an individual must meet two primary qualifications within a tax year: 

1.    More than Half of Personal Services Must Be in Real Property Trades or Businesses - The first criterion requires that over half of the personal services you perform in any trade or business during the tax year are in real property trades or businesses in which you materially participate. This ensures that most of your professional effort is dedicated to the real estate sector.

2.    Minimum of 750 Hours of Services - The second qualification stipulates that you must perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate. This quantifiable measure ensures a significant time investment in real estate activities. 

It's important to note that these qualifications apply on an individual basis, meaning that for married taxpayers filing jointly, one spouse must independently meet these criteria without considering the services of the other spouse.

Tax Ramifications of Being a Real Estate Professional - Being classified as a real estate professional carries significant tax implications, primarily related to the treatment of rental real estate activities and passive activity loss (PAL) rules. 

3.    Treatment of Rental Real Estate Activities - Typically, this situation applies to real estate agents or brokers who personally own real property that they rent out. Generally, rental activities are considered passive, and losses from these activities can only be deducted against passive income. However, real estate professionals, as defined for tax purposes, can treat losses from rental real estate activities in which they materially participate as nonpassive. This allows them to deduct these losses against other types of income, such as wages or business income, potentially resulting in substantial tax savings.

4.    Material Participation and Record-Keeping - To benefit from the nonpassive loss treatment, real estate professionals must demonstrate material participation in their rental real estate activities. This typically involves participating in the activity for more than 500 hours during the tax year. It's crucial for real estate professionals to maintain meticulous records of their participation, including hours worked, to substantiate their claims in case of an IRS audit.

5.    Election to Aggregate Rental Real Estate Interests - Real estate professionals have the option to elect to treat all their interests in rental real estate as a single activity. This election can simplify the process of proving material participation across multiple properties. However, once made, this election is binding for the tax year it's made and for all future years in which the taxpayer qualifies as a real estate professional.

6.    Closely Held C Corporations - It's also worth noting that closely held C corporations can qualify as real estate professionals if more than 50% of their gross receipts for the tax year are derived from real property trades or businesses in which they materially participate. 

The designation of a real estate professional is not merely about the title but has profound tax implications that can affect your financial landscape. The ability to deduct rental real estate losses against other income can lead to significant tax savings, making it a coveted status among real estate investors. However, the IRS's stringent criteria and the necessity for detailed record-keeping underscore the importance of diligence and accuracy in pursuing this designation.

Moreover, the tax playing field is ever evolving, and numerous court cases highlight the critical nature of understanding and correctly applying the rules. For instance, the case of Gragg v. Commissioner emphasized the necessity of proving material participation in rental activities, separate from one's profession as a real estate agent. In this case, when the IRS audited the taxpayers’ return, the Service requested “a written log of all. . . rental related activities that [would] support the deduction claimed.” In response, the Graggs submitted two undated one-page notes estimating the hours Mrs. Gragg spent working on the Graggs’ rental properties in the tax year under audit. The court found that the notes were insufficient to prove that Mrs. Gragg had materially participated in the rental activities, and the fact that she worked as a professional real estate agent didn’t automatically qualify her as a tax professional for tax purposes. The take-away from this case is the importance of maintaining contemporaneous written records documenting dates, time spent, and description of each activity related to the rental property.

Achieving the status of a real estate professional for tax purposes requires a careful balance of time investment and strategic planning. The benefits, particularly regarding the treatment of rental losses, can be substantial, but they come with the responsibility of meticulous documentation and adherence to IRS rules. As with many aspects of tax law, the devil is in the details. Please contact this office for further information related to qualifying as a real estate professional and navigating this complex terrain.

 


Free Up Time to Enjoy Summer with QuickBooks Online's Recurring Transactions Feature

Summer is the perfect time to relax and enjoy the warm weather, but accounting tasks can eat into your valuable leisure time. The last thing you need is to spend unnecessary hours on repetitive financial activities for your small business. If you’ve created a record or transaction once, you don’t want to have to enter the information a second or third time. 

That's where QuickBooks Online comes in, with its powerful recurring transactions feature designed to streamline your accounting processes and free up time for what matters most.

Using QuickBooks Online is superior to manual accounting because it “remembers” everything, allowing you to reuse data when needed. However, like all technology, sometimes QBO requires a bit of guidance, especially for recurring transactions. If you have forms that you create repeatedly with minimal changes, like utility bills, for instance, you can tell the software to  “memorize” these transactions. When the bill comes around the next month, you can quickly modify any necessary details and dispatch it again. 

Here’s how it works.

Three Options for Recurring Transactions

To get started, enter a transaction you want to save and reuse (with changes). For example, let's say it's an invoice you send to a customer monthly for a service contract. After completing the form, look toward the bottom of the screen and click "Make recurring." The screen will now read "Recurring Invoice," displaying new options.

You can specify transactions as recurring and add details like frequency and start/end dates. If you want to change the template name to something more descriptive, you can easily do so. Under the “Interval” field, select “Daily”, “Weekly”, “Monthly”, or “Yearly”, and indicate the specific day of the month the transaction should occur. Enter a “Start” date and “End” date, or select “None” if the service is open-ended. 

Next to the template name is a field labeled “Type”. QuickBooks Online gives you three options for handling the recurring transaction:

  • Scheduled: This automated option sends the transaction as scheduled without any intervention from you. Only the date will change. Use this option with caution to ensure all details remain accurate.

  • Reminder: QuickBooks Online sends you a reminder ahead of the scheduled date. You can specify how many days in advance you want to be notified. This allows you to make any necessary changes before sending out the transaction.

  • Unscheduled: QuickBooks Online saves your template but takes no further action until you manually process it.

When you’ve completed all the required fields, click "Save template" in the lower left.

Using Recurring Transactions

If you’ve chosen the “Scheduled” option for any transactions, you don’t need to do anything more until you want to change its content or status. 

To find your list of recurring transactions for those marked as “Reminder” or “Unscheduled”, click the gear icon in the upper right of the QuickBooks Online screen. Under Lists, click "Recurring transactions."

The screen that opens displays a table containing all your recurring transactions. You can learn almost everything you need to know about these transactions here: “Template Name”, “Type”, “Transaction Type”, “Interval”, “Previous Date”, “Next Date”, “Customer/Vendor”, and “Amount”.

The last column in the table, labeled “Action”, opens a menu with different options depending on the type of transaction. For our “Reminder” example, you can:

  • Edit (edit the template, not the transaction)

  • Use (open the original transaction that you can edit, save, and send)

  • Duplicate (duplicate the template)

  • Pause (temporarily stop sending reminders)

  • Skip next date

  • Delete
Looking Ahead

As you dive into the rest of 2024, consider whether QuickBooks Online is meeting all your needs. If you’re starting to outgrow your current version, we’d be happy to discuss the benefits of upgrading to another service level, such as Essentials, Plus, or Advanced. 

Alternatively, if your current version has features you need but you can’t quite figure them out, let us know. Our goal is to make the second half of 2024 productive and stress-free for you, ensuring your accounting processes are as efficient and painless as possible.



Davidson Fox & Company LLP
53 Chenango St. 3rd Floor
Binghamton, NY 13901
Ph: (607) 722-5386
kgrace@davidsonfox.com
 
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