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Tax Tip of the Week | No. 421 | The Most Overlooked Business Deduction August 23, 2017

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Tax Tip of the Week | Aug 23, 2017 | No. 421 | The Most Overlooked Business Deduction

Way back in 2004 Congress added a new Internal Revenue Code Section that allows a deduction to businesses just for operating a business. There is no requirement to buy anything, there is no requirement to spend anything, and there is no requirement to borrow anything. This deduction is available to sole proprietors, farmers, LLC’s, S corporations and C Corporations, and is available just for “doing what you are doing”. Yes, it is a true made-up deduction, just like non-cash charity deductions, only this one is legal! We call this deduction the Domestic Production Activities Deduction (DPAD), but the IRS calls it the manufacturer’s and producer’s deduction.

The deduction is 9% of the lesser of net income or qualified production income (the deduction is limited to 50% of wages). So nearly any business with qualified production income is able to take an additional 9% deduction just for producing a product. This means that a farmer gets a 9% of net income deduction without spending any more money. It means machine shop clients, builders, developers, manufacturers, print shop operators and many more business owners will get this deduction as well.

The deduction is aimed at companies that produce a tangible product in the United States, and that employ workers to do so. And yes, it is 9% of the profit! The owner that qualifies and makes $100,000 will only pay tax on $91,000 if you remember this deduction.

The deduction is taken on IRS Form 8903, which has been unchanged for many years. It is taken directly on the applicable schedule C or F, or as a flow through item on a K-1 for partnerships, LLCs and S corporations.

The deduction is available to taxpayers whose activities are the manufacture, production or growth of items they sell, which include:

•    The sale of tangible personal property
•    The sale of computer software (but not online services)
•    The sale of recordings, books, tapes, CD’s and DVD’s
•    Business interruption proceeds and payments not to produce
•    Farming, raising animals and fishing
•    Printing (including advertising sales in printed publications)
•    Most new construction and renovation.

Activities that do not qualify for the deduction include most service businesses and most grocery stores and restaurants unless the restaurant packages and sells products that it produced itself.

If you own a business, give us a call to make sure you are not missing out on this important deduction.

An upcoming event that would qualify for a personal charitable deduction would be attending the STEMM Charity Gala presented by the Dayton Defense Education Foundation. The Gala takes place on 9/23/17, more information and event registration can be found by clicking the link below:

http://www.daytondefense.org/home/events.html#id=146&cid=667&wid=401&type=Cal

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 420 | Where Ohio Ranks for Taxes August 16, 2017

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Tax Tip of the Week | Aug 16, 2017 | No. 420 | Where Ohio Ranks for Taxes

The following is a summary of a report recently issued by the Buckeye Institute:

About a dime out of every dollar Ohioans earn, on average, is taken by local and state taxes.

How does that compare to other states? 

The Buckeye Institute in Columbus and the Tax Foundation in Washington, D.C., partnered to produce a report that attempts to answer that question and provides other interesting facts and tidbits.

The Tax Foundation is a think tank that does research and analysis of tax policies. The foundation describes itself as independent, but often advocates conservative policies.

The Buckeye Institute is a conservative-leaning think tank that advocates for “free-market public policy in the states.”

But what’s good from one political viewpoint might be bad from another.

For example, the Buckeye Institute said in releasing the report that “Ohio’s growing tax burden has resulted in slower economic growth for the state over the past several decades.”

Combined taxes; Ohio ranks 19th highest

Adding up state and local taxes, Ohio ranks 19th highest in the country. Ohioans pay nearly a dime in taxes out of every $1 earned.

Ohio’s rate of 9.8 percent for state and local taxes on average is close to the rates in the neighboring states – Michigan (9.4 percent), Indiana (9.5 percent), Kentucky (9.5 percent), West Virginia (9.8 percent) and Pennsylvania (10.2 percent).

Credit given for city income taxes paid where people work

Most Ohio cities and villages don’t impose their income taxes on residents who pay equal or more income taxes to the city where they work, instead granting the residents a 100 percent “credit.”

For example, the city of Centerville has a 2.25 percent income tax, but collects nothing from residents who work in Oakwood and pay Oakwood’s 2.5 percent income tax.

But some cities in the area such as Xenia and Springboro, give only partial credit. So, workers end up paying income taxes to the communities where they work and taxes to the communities where they live.

Ohio’s sales tax is nearly double original rate

Ohio’s sales tax was established in 1935 and went unchanged at 3 percent for 32 years, then increased to 4 percent in 1967. The rate most recently increased in 2013, to 5.75 percent.

Each county also tacks on additional sales taxes. Once the county and state taxes are combined, rates range from 6.75 percent from Greene and Warren counties, to 7.25 percent from Montgomery County, to a high of 8 percent in Cuyahoga County.

Ohio and U.S. local and state revenue sources

The sources of Ohio and local tax revenue is similar to the national trends. The biggest chunk is from sales taxes. In Ohio, 36 percent of the money is raised through sales taxes. That compares to a national average of 35 percent.

Ohio collects a little more through income taxes than most places – 27 percent versus the U.S. average of 23 percent. And Ohio collects a little less from property taxes – 29 percent versus 31 percent nationally.

Average property tax rates by county

The study rated Ohio ninth highest in the country with property taxes amounting to 1.57 percent of the home values on average. The highest property tax rates are in the state’s two largest counties – 2.13 percent in Cuyahoga County and 2.04 percent in Franklin County.

Sales taxes by state

Combining state and county sales taxes, the average rate in Ohio is 7.14 percent.

The 7.14 percent average rate ranks Ohio near the middle nationally, 19th among the 50 states and the District of Columbia.

Two of the states that impose no state income taxes have some of the highest sales tax rates – Washington at 8.92 percent and Texas at 8.19 percent.

A handful of states have no sales tax – Alaska, Delaware, New Hampshire, Montana and Oregon.

State, local tax collections in Ohio above national average

State and local tax collections per capita in Ohio have been above the national average since the mid-1980s, though the gap has closed in recent years.

Ohio and local governments collected $1,138 per capita in 2014, up from an inflation-adjusted total of $210 in 1974.

Ranking Ohio’s business taxes

The Tax Foundation and the Buckeye Institute created a ranking for various types of taxes on businesses and concluded that Ohio ranks low for unemployment insurance taxes (fourth lowest) and property taxes (11th), but high for individual income taxes (47th) and corporate taxes (45th).

Note: included for corporate taxes was Ohio’s commercial activities tax.

Other findings

The Tax Foundation and the Buckeye Institute included in its report a profile of Ohio on a variety of other topics. Some highlights are below.

Ohio is a cheap place to live, according to the report. In comparison to other states, $100 in Ohio is really worth $112. Just six states were identified as better bargains – Alabama, Arkansas, Kentucky, Mississippi, South Dakota and West Virginia.

On the flip side, $100 is only worth $86.43 of spending power in New York State.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 419 | You Make The Call – Head of Household August 9, 2017

Posted by bradstreetblogger in : Deductions, General, Tax Preparation, Tax Tip, Taxes, Uncategorized , add a comment

Tax Tip of the Week | Aug 9, 2017 | No. 419 | You Make The Call – Head of Household

You Make the Call is a monthly format of questions and answers our office faces on a daily basis.  We hope you will find these tips to be a quick and fun read.

QUESTION: The taxpayer’s mother lives in her home and she has provided care for her for several years. Her mother’s only income is from social security. The taxpayer pays over half of the living expenses for her mother, therefore she is her dependent. If her mother dies in January, can the taxpayer still claim head of household in the year of death?

ANSWER: Yes, as long as the taxpayer is eligible to claim her mother as a dependent. For head of household purposes, “The taxpayer and such other person must occupy the household for the entire taxable year of the taxpayer. However, the fact that such other person is born or dies within the taxable year will not prevent the taxpayer from qualifying as a head of household if the household constitutes the principal place of abode of such other person for the remaining or preceding part of such taxable year”. There is a similar explanation for dependency purposes that states, “The fact that the dependent dies during the year shall not deprive the taxpayer of the deduction if the dependent lived in the household for the entire part of the year preceding his death.”

Please note that the question and answer provided does not take into account all options or circumstances possible.  Call us if you find yourself in a similar situation.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 418 | A Closer Look at the Upcoming Sales Tax Holiday August 2, 2017

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Tax Tip of the Week | Aug 2, 2017 | No. 418 | A Closer Look at the Upcoming Sales Tax Holiday

Ohio shoppers have probably started to become accustomed to this “back to school” seasonal sales tax holiday, and they certainly won’t be disappointed this year. The Ohio sales tax holiday will begin at 12:01 a.m. Friday, August 4 and end at 11:59 p.m. on Sunday August 6, 2017. Expect heavier than normal traffic at some of your favorite stores, though hopefully it won’t be as raucous as a typical Black Friday in November.

The intention of the sales tax holiday is to boost sales while giving taxpayers a break on back to school items such as pens, notebooks, jeans and shoes. During the 2015 sales tax weekend, Ohio consumers saved $3.3 million in taxes on $46.75 million worth of back-to-school purchases, according to research by the University of Cincinnati Economics Center, with the average family saving about $40.

During this time period only, you can buy certain items and not pay any sales or use tax. Those items fall into the following categories: an item of clothing priced at $75 or less; a school supply item priced at $20 or less; and an item of school instructional material priced at $20 or less.

Unfortunately, items used in a trade or business are not exempt under the sales tax holiday, so you will not be able to take advantage for your business.

These are a few of the questions we are asked most frequently about the sales tax holiday:

Can retailers/vendors choose not to participate in the sales tax holiday? No. The sales tax holiday is set by law and vendors must comply.

Can multiple qualifying items be purchased in a single tax-exempt transaction? Yes. There is no limit on the amount of the total purchase. The qualification is determined item by item. So, if you purchased two pair of pants, a pair of shoes and a jacket and each item cost $50, the total purchase of $200 would be tax exempt.

What clothing items qualify? For the sales tax holiday “clothing” is defined as all human wearing apparel suitable for general use and covers more than you might expect. Traditional items such as shirts, pants, skirts, sweaters, dresses and shoes are included, but so are disposable diapers, formal wear and wedding apparel. For a full list of clothing items that qualify visit www.tax.ohio.gov. Items purchased to be used in businesses or trades are not eligible for the sales tax holiday.

If the selling price of an item of clothing is $90, is the first $75 exempt from the sales tax? No. The exemption applies only to items selling for $75 or less. Therefore if an item of clothing sells for more than $75, tax is due on the entire selling price. In addition, retailers cannot split items that are normally sold together in order to fall under the sales price threshold. In other words, if the store is selling a pair of shoes for $100, they cannot sell the shoes separately at $50 each.

What qualifies as a school supply? “School supplies” are very specifically defined and include items like binders, book bags, calculators, composition books and notebooks. You can find a complete list of qualifying items at the Ohio Department of Taxation website. Items not specifically listed are subject to sales and use tax.

How are coupons and discounts handled? If a retailer offers a discount to reduce the price of an eligible item to $20 or less (school supplies) or $75 or less (clothing), the item will qualify for the exemption. This applies to all discounts even if a retailer’s coupon or loyalty card is required to secure the discount.

Does the exemption apply to mail, telephone, e-mail and internet orders? Yes. Qualified items sold to consumers by mail, telephone, e-mail, or internet do qualify for the sales tax exemption if the consumer orders and pays for the item and the retailer accepts the order during the exemption period for immediate shipment, even if delivery is made after the exemption period.

So make your list, check it twice, and schedule some time the first weekend in August to hit the stores!

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

Rick Prewit – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 417 | Five Home Office Deduction Mistakes July 26, 2017

Posted by bradstreetblogger in : Deductions, General, Tax Planning Tips, Tax Tip, Taxes , add a comment

Tax Tip of the Week | July 26, 2017 | No. 417 | Five Home Office Deduction Mistakes

Here are five common mistakes of those who deduct home office expenses.

1. Not taking it. Some believe the home office deduction is too complicated, while others believe taking the deduction increases your chance of being audited.

2. Not exclusive or regular. The space you use must be used exclusively and regularly for your business.

• Exclusively: Your home office cannot be used for another purpose.

• Regularly: It should be the primary place for conducting regular business activities, such as recordkeeping and ordering.

3. Mixing up your other work. If you are an employee for someone else in addition to running your own business, be careful in using your home office to do work for your employer. Generally, IRS rules state you can only use a home office deduction as an employee if your employer doesn’t provide you with a local office.

4. The recapture problem. When selling your home you will need to account for any home office depreciation. This depreciation recapture rule creates a possible tax liability for many unsuspecting home office users.

5. Not getting help. The home office deduction can be tricky, so ask for help, especially if you fall under one of these cases.

As always it is a good idea to call before considering any deductions.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 416 | Reap the Benefits of Hiring Your Child for the Summer July 19, 2017

Posted by bradstreetblogger in : Deductions, General, Tax Planning Tips, Tax Tip, Taxes, Uncategorized , add a comment

Tax Tip of the Week | July 19, 2017 | No. 416 | Reap the Benefits of Hiring Your Child for the Summer

Hiring your children to work in your business can be a win-win situation for everyone. Your kids will earn money, gain real-life experience in the workplace, and learn what you do every day. And you will reap a few tax benefits in the process. The following guidelines will help you determine if the arrangement will work in your situation.

• Make sure your child works a real job that he or she can reasonably handle, no matter how basic or simple. Consider tasks like office filing, packing orders, or customer service.

• Treat your child like any other employee. Expect regular hours and appropriate behavior. If you are lenient with your child, you risk upsetting other employees.

• To avoid questions from the IRS, make sure the pay is reasonable for the duties performed. It’s not a bad idea to prepare a written job description for your files. Include a W-2 at year-end.

• Record hours worked just as you would for any employee. If possible, pay your child using the normal payroll system and procedures your other employees use.

• Hiring your children works best if you are a sole proprietor. It has additional tax benefits not  available if your business is organized as a C corporation or an S corporation.

If you have questions, give us a call. Together we can determine if hiring your child is the right course of action for your business and family.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 415 | OSCPA Supports Mobile Workforce Proposal July 12, 2017

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Tax Tip of the Week | July 12, 2017 | No. 415 | OSCPA Supports Mobile Workforce Proposal

The following is a brief update on the Ohio Society of CPAs lobbying efforts in Washington D.C.:

OSCPA is again backing legislation to simplify state income tax requirements for employees who work multiple days per year outside the state of their residence — this time in the federal Mobile Workforce State Income Tax Simplification Act.

Ohio Senator Sherrod Brown, D-Cleveland, again is one of the lead sponsors of the act. The Ohio Society of CPAs recently wrote a letter to Ohio’s other senator, Rob Portman, R-Cincinnati, urging him to support the bill. Portman joined as a co-sponsor to similar legislation in the last Congressional session.

The act would simplify the complex tax reporting rules employers and employees face because of numerous state income tax withholding laws and varying de minimis exemption periods when employees work outside their home states. OSCPA has long supported such a move.

The legislation would create a uniform national standard and would simplify compliance with all the different state laws. The earnings of employees would not be subject to state income tax and withholding outside their home state unless the employee works in a state for more than 30 days during the calendar year.

The same bill was approved by the House in September, but was not taken up by the Senate before Congress expired in December. The proposal did, however, attract wide bipartisan support. OSCPA and other state CPA societies hope to garner enough support to pass legislation this year.

We’ll keep you posted……

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 414 | You Make The Call – EITC July 5, 2017

Posted by bradstreetblogger in : Deductions, General, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes , add a comment

Tax Tip of the Week | July 5, 2017 | No. 414 | You Make The Call – EITC

You Make the Call is a monthly format of questions and answers our office faces on a daily basis.  We hope you will find these tips to be a quick and fun read.

QUESTION: Jamie and Claire are married and have total earned income of $40,000. They have a daughter, Bree, age 22 who graduated from college in May. After graduation, Bree moved back home with her parents and worked. She lived at home from June until December and earned $22,000.

Jamie and Claire would like to know if they are still eligible for the earned income tax credit (EITC) using Bree as a qualifying child for EITC purposes, and Bree would like to know if she may claim her own exemption when preparing her tax return this year.

ANSWER: Yes and yes. Under the qualifying child rules for purposes of dependency, Bree meets all the requirements except for support. Because she earns $22,000, she provides more than half of her own support. Therefore, Jamie and Claire may not claim her as a dependent. However, for EITC purposes because all the dependency tests are met, except for support, she is still a qualifying child for EITC. Therefore, Jamie and Claire may still receive EITC using Bree as a qualifying child for EITC purposes.

Additionally, because Bree is no longer a qualifying child for dependency purposes, she may claim her own exemption when she files her return.

Please note that the question and answer provided does not take into account all options or circumstances possible.  Call us if you find yourself in a similar situation.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 413 | Learning From Prince’s $250 Million Mistake June 28, 2017

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Tax Tip of the Week | June 28, 2017 | No. 413 | Learning From Prince’s $250 Million Mistake

Finally, over a year after the date of his death, a judge confirmed Prince’s six siblings to be his rightful heirs – after more than 45 people had come forward claiming to be his wife, children, siblings or other relatives.

Last year, the legendary musician passed away, leaving behind not only a legacy of unparalleled music, but also a $250 million fortune – with no will or estate plan to be found. With the long-anticipated announcement that his siblings will inherit his fortune, we’re reminded again of the importance of planning ahead and hiring trusted experts to carry out your wishes.

Whether you have people clamoring after your money or not, it’s important to consider hiring an expert to sort through the, at times, very complicated process of estate planning. There are DIY websites and software packages that may seem attractive (and cheap!), but more often than not, you get what you pay for. More complicated life situations, such as children from a prior marriage, children with special needs, or capital gains from property appreciation, require the hands-on insight of an expert.

It is important to have an unbiased third party look over your documents. Even U.S. Supreme Court Chief Justice Warren E. Burger, who died in 1995, should have relied on estate planning experts to prepare his estate plan – but instead he took it upon himself, and his family paid over $450,000 in taxes because of his errors.

To be better prepared than Prince and Chief Justice Burger, seek out the assistance of an attorney or a CPA to draft a will and do estate planning, respectively. An attorney will help you navigate a will, and a CPA is best positioned to help with more complicated estate planning.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 412 | Social Security Earnings Amount Increases June 21, 2017

Posted by bradstreetblogger in : Deductions, tax changes, Tax Planning Tips, Tax Tip, Taxes , add a comment

Tax Tip of the Week | June 21, 2017 | No. 412 | Social Security Earnings Amount Increases

For 2015-2016, the maximum wage amount subject to social security tax was $118,500.  For 2017, the maximum wage amount subject to social security withholding will be $127,200.

If you are an employee, this will be the wage amount shown in Box 3 of your W-2.

If you are self-employed, you will be subject to social security tax up to $127,200 of your net business income.

There remains no earnings limit subject to Medicare tax withholdings.  Any earnings for employees over $127,200 will still be subject to a 1.45% Medicare tax (2.90% Medicare tax if self-employed).

Especially for those who are self-employed, you may need to adjust your quarterly estimated payments.  As always, give us a call if you have any questions.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.