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BWC Board Approves 10% Rate Cut for Public Employers September 23, 2020

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

Ohio’s public employers will pay $14.8 million less in premiums to the Ohio Bureau of Workers’ Compensation (BWC) in 2021 thanks to a rate cut the BWC Board of Directors approved Friday.

The rate reduction means approximately 3,700 counties, cities, public schools and other public taxing districts will pay an average of 10% less on their annual premiums than this calendar year. The reduction, made possible by declining injury trends and relatively low medical inflation costs, is the twelfth cut for public employers since 2009 and follows a 10% cut that went into effect in January.

“We are pleased to pass these savings along to our public employer community, especially as the COVID-19 pandemic continues to challenge our economy,” said BWC Administrator/CEO Stephanie McCloud. “It is our hope they invest these dollars in workplace safety and improving their communities.”

The 10% reduction represents an average statewide change to premiums and does not include costs related to the administrative cost fund or other funds BWC administers. The actual total premium paid by individual employers depends on several factors, including the expected future claims costs in their industry, their company’s recent claims history, and their participation in various BWC programs.

A history of BWC rate changes since 2000 can be found online by clicking this link.

Credit given to BWC Website, News Release August 24, 2020

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

–until next week.

How to Owe Nothing with Your Federal Tax Return September 9, 2020

Posted by bradstreetblogger in : Depreciation options, General, tax changes, Tax Preparation, Tax Rules, Tax Tip , add a comment

Here’s how to fine-tune your W-4 and avoid writing a fat check next year.

It’s a calming thought: owing nothing on your federal tax return. And you can make it happen if you handle your withholding strategically.

Here’s how:

The W-4 form that you fill out for your employer when you start a new job determines how much income tax will be withheld from your paycheck and, ultimately, how much tax you will either owe or get back as a refund at the end of the year.

What you may not know is that it’s not a one-time thing. You can submit a revised W-4 form to your employer whenever you want. Managing how much your employer withholds through your W-4 form will give you a better shot at owing no taxes come April.

You also should avoid having too much withheld, of course. That would be giving Uncle Sam an interest-free loan all year.

Here’s how to get your tax bill closer to zero before tax time arrives:

KEY TAKEAWAYS
• The W-4 form that you fill out for your employer determines how much tax is withheld from your paycheck throughout the year.
• An online calculator can help you estimate your tax liability for the year and determine whether you’re having too little or too much withheld.
• Once you know that, you can submit a new W-4 to get you closer to owing zero at tax time.

Estimate What You’ll Owe
If you are a salaried employee with a steady job, it’s relatively easy to calculate your tax liability for the year. You can predict what your total income will be.

Millions of Americans don’t fall into the above category. They work freelance, have multiple jobs, work for an hourly rate, or depend on commissions, bonuses, or tips. If you’re one of them, you’ll need to make an educated guess based on your earnings history and how your year has gone so far.

From there, there are several ways to get a good estimate of your tax liability:

Use an Online Check Calculator
There are a number of free income tax calculators online. If you enter your gross pay, your pay frequency, your federal filing status, and other relevant information, the calculator will tell you your federal tax liability per paycheck.

You can multiply that by the number of pay periods in a year to see your total tax liability.

This method is easy, and the result will be reasonably accurate, but it may not be perfect since your actual tax liability may depend on some other variables, such as whether you itemize deductions and which tax credits you claim.

Use a Tax Withholding Estimator
The tax withholding estimator on the Internal Revenue Service website is particularly useful for people with more complex tax situations.

It will ask about factors like your eligibility for child and dependent care tax credits, whether and how much you contribute to a tax-deferred retirement plan or health savings account, and how much federal tax you had withheld from your most recent paycheck.

Based on the answers to your questions, it will tell you your estimated tax obligation for the year, how much you will have paid through withholding by year’s end, and your expected over-payment or underpayment.

Fill Out a Sample Tax Return
Another option is to complete a sample tax return for the year, either by using tax software or by downloading the forms you need from the IRS website and filling them out by hand.

This method should give you the most accurate picture of your annual tax liability.

If you’re using last year’s tax software or IRS forms, make sure there haven’t been significant changes to the rules or the tax rates that would affect your situation.

How To Get The Most Money Back On Your Tax Return

Adjust Your Tax Withholding
Once you know the total amount you will owe in federal taxes, the next step is figuring out how much you need to have withheld per pay period to reach that target but not exceed it by Dec. 31.

Then fill out a new W-4 form accordingly.

You don’t have to wait for your employer’s HR department to hand you a new W-4 form. You can print one yourself from the IRS website.

If Not Enough Is Being Withheld
The W-4 form has a place to indicate the amount of additional tax you’d like to have withheld each pay period.

If you’ve underpaid so far, subtract the amount you’re on track to pay by the end of the year, at your current level of withholding, from the amount you will owe in total. Then divide the result by the number of pay periods that remain in the year.

That will tell you how much extra you want to have withheld from each paycheck.

You could also decrease the number of withholding allowances you claim, but the results won’t be as accurate.

If You’ve Been Overpaying
Unless you’re looking forward to a big refund, try increasing the number of withholding allowances you claim on the W-4.

Deciding on the exact number can be tricky. The best method is to plug different numbers of withholding allowances into a paycheck calculator until it hits the amount closest to the federal tax you want to have withheld for each pay period going forward.

Note that the IRS requires that you have a reasonable basis for the withholding allowances you claim. It doesn’t want you fiddling with its form just to avoid paying taxes until the last minute.

If you don’t have enough tax withheld, you could be subject to underpayment penalties.

Bear in mind that you need to have enough tax withheld throughout the year to avoid underpayment penalties and interest. You can do that by making sure your withholding equals at least 90% of your current year’s tax liability or 100% of your previous year’s tax liability, whichever is smaller.

You’ll also avoid penalties if you owe less than $1,000 on your tax return.

Other Considerations
If it’s so early in the year that you haven’t received any paychecks yet, you can just divide your total tax liability for the year that just ended by the number of paychecks you receive in a year. Then, compare that amount to the amount that’s withheld from your first paycheck of the year once you get it and make any necessary adjustments from there.

If you adjust your W-4 to make up for any underpayment or over-payment partway through the year, you’ll want to fill out a new W-4 in January or your withholding will be off for the new year.

Of course, if your income fluctuates unpredictably, this is all a lot harder. But following the steps above should help you get close to a reasonable number.

And remember: You can redo your W-4 several times during the year if necessary.

Article credit given to – Amy Fontinelle – click here for original article

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

–until next week.

Fraud in your Workplace September 2, 2020

Posted by bradstreetblogger in : Fraud, General, Tax Rules, Tax Tip , add a comment

Heaven forbid – but, if you have some underhanded activities going on at your company – the culprit is often someone that you suspect the least. The numbers below are alarming. And, I wonder how many fraudsters are never caught.                                     
                   -Mark Bradstreet

Inventory is short, money is missing from the till, or you’re reimbursing an employee for bogus T&E costs. These are all examples of employee fraud. It’s probably not a question of whether you experience it but rather how much employee fraud is costing your business.

According to the Association of Certified Fraud Examiners’ 2018 Report to the Nations on Occupational Fraud and Abuse, workplace fraud is widespread.

Here are some alarming statistics:

•    The median loss to a small business (fewer than 200 employees) is $200,000, which is nearly double the amount ($104,000) for larger companies.
•    The most common schemes in small businesses include corruption, billing, check and payment tampering, expense reimbursements, skimming, and  cash on hand. Fraud is primarily detected by a tip, although management review and internal audits are also useful.
•    Almost half (48%) of fraud in companies of all sizes is by rank-and-file employees, although management isn’t far behind (31%). In small businesses, 29% of frauds are perpetrated by an owner or executive.

What do these stats mean to you?

These statistics should be a wake-up call for you to put business practices in place that can minimize the risk of fraud by your employees. The report found that small businesses typically have fewer anti-audit controls than large companies, leaving them more vulnerable to fraud. But you can take action that will help. Here are some ideas to use:

•    Code of conduct
•    Data monitoring and analysis
•    Dedicated fraud team
•    External audits
•    Formal fraud risk assessments
•    Fraud training for managers and employees
•    Job rotation and mandatory vacations
•    Physical barriers (alarms, limited access to cash, cameras, etc.)
•    Rewards for whistle-blowers

Insurance protection

Check your current business policy to see what is and what is not covered in the way of theft. You may need employee theft coverage (“employee dishonest coverage”) as an add-on to your existing business owner’s policy (BOP). Even assuming your policy covers employee theft, it could have a cap as little as $10,000 or $25,000; given that the average theft is over $100,000, you may want to raise the limit. Talk with your insurance agent to understand what your current policy covers and what changes you can make to obtain better protection in case of employee fraud.

Final thought

Today, with computers it’s easier than ever for employees to commit fraud. Pay special attention to controls over your data and access to sensitive company information (bank accounts, customer lists, etc.). The Computer Fraud and Abuse Act (“CFAA”) is a federal law that prohibits intentionally accessing a computer without authorization. It has been used successfully by employers in certain situations to obtain civil penalties against former employees who take information from company computers.

This week’s author – Mark Bradstreet

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

–until next week.

How Taxes Can Affect Your Inheritance August 26, 2020

Posted by bradstreetblogger in : Business consulting, General, Tax Planning Tips, Tax Rules, Tax Tip , add a comment

You could potentially be liable for three types of taxes if you’ve received a bequest from a friend or relative who has died: an inheritance tax, a capital gains tax, and an estate tax. An inheritance tax is a tax on the property you receive from the decedent. A capital gains tax is a tax on the proceeds that come from the sale of property you may have received. And finally, an estate tax is a tax on the value of the decedent’s property; it’s paid by the estate and not the heirs, although it could reduce the value of the inheritance.

Taxes at the Federal Level
The Internal Revenue Service (IRS) really only cares about any capital gains tax you might end up owing. The federal government doesn’t impose an inheritance tax, and inheritances generally aren’t subject to income tax. If your aunt leaves you $50,000, that’s not considered income so the cash is tax-free—at least as far as the IRS is concerned.

State Inheritance Taxes
You probably won’t have to worry about an inheritance tax, either, because only six states collect this tax as of 2019: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. If the decedent lived or owned bequeathed property in any of the other 44 states, you can collect your gift free of an inheritance tax—even if you live in one of these six states.

Property passing to a surviving spouse is exempt from inheritance taxes in all six of these states, and only Nebraska and Pennsylvania collect inheritance taxes on property passing to children and grandchildren.

You still might not owe an inheritance tax even if the decedent lived in one of the six states that have one, depending on your relationship to them.

State Income Taxes and Federal Income Taxes
You won’t have to report your inheritance on your state or federal income tax return because an inheritance is not considered taxable income. But the type of property you inherit might come with some built-in income tax consequences.

For example, if you inherit a traditional IRA or a 401(k), you’ll have to include all distributions you take out of the account in your ordinary federal income, and possibly your state income as well.

The Capital Gains Tax
This tax is applied to the difference between the value of an asset and the amount you sell it for. If you sell it for less than its value, this is a capital loss and no tax is due. If you sell it for more than its value, however, you’ll be taxed on the gain.

Fortunately, the long-term capital gains tax rate is typically kinder than the tax brackets that individuals are subject to on their incomes, and inheritances qualify for the long-term rate. Plus, your inheritance receives a “stepped-up basis” to the date of the decedent’s death as well.

For example, you might inherit a house that’s valued at $250,000 on the decedent’s date of death. You then sell the property for $275,000 a few years later. You would owe long-term capital gains tax on $25,000.

Even if the decedent purchased the property decades ago for $100,000, your gain isn’t calculated using this number. It’s stepped up to the value of the property as of the date of death, which typically results in less of a taxable profit—$25,000 as opposed to $175,000 using a sales price of $275,000 in this scenario.

State Estate Taxes and Federal Estate Taxes
State and federal estate taxes might also come due. The good news here is that the 2019 federal estate tax exemption is $11.4 million. An estate won’t owe any estate tax if its value is less than this.

But 12 states and the District of Columbia also collect an estate tax at the state level as of 2019. These states are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington.

If you inherit from a decedent who did not live or own bequeathed property in any of these states, the estate won’t owe any state estate taxes, just as is the case with inheritance taxes in states that collect them.

Otherwise, the value of the estate must exceed the state’s estate tax exemption before any state estate taxes will be owed. Unfortunately, these exemptions are typically much less than the federal exemption. For example, it’s only $1 million in Oregon and in Massachusetts as of 2019.

If the estate owes state estate taxes, these taxes must be paid before you can receive your inheritance. The amount that you receive will most likely already have been reduced by the taxes that were due.

Article credit given to – Julie Garber – click here for original article

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

–until next week.

“Dirty Dozen” List of Tax Scams for 2020 July 22, 2020

Posted by bradstreetblogger in : COVID, COVID-19, General, Tax Rules, Tax Tip, Taxes, Uncategorized , add a comment

On July 16, 2020, the Internal Revenue Service announced its annual “Dirty Dozen” list of tax scams with a special emphasis on aggressive and evolving schemes related to coronavirus tax relief, including Economic Impact Payments.

On July 16, 2020, the Internal Revenue Service announced its annual “Dirty Dozen” list of tax scams with a special emphasis on aggressive and evolving schemes related to coronavirus tax relief, including Economic Impact Payments.

This year, the Dirty Dozen focuses on scams that target taxpayers. The criminals behind these bogus schemes view everyone as potentially easy prey. The IRS urges everyone to be on guard all the time and look out for others in their lives.

“According to a cpa tax scams tend to rise during tax season or during times of crisis, and scam artists are using the pandemic to try stealing money and information from honest taxpayers,” said IRS Commissioner Chuck Rettig. “The IRS provides the Dirty Dozen list to help raise awareness about common scams that fraudsters use to target people. We urge people to watch out for these scams. The IRS is doing its part to protect Americans. We will relentlessly pursue criminals trying to steal your money or sensitive personal financial information.”

Taxpayers are encouraged to review the list in the “special section” on IRS.gov and be on the lookout for these scams throughout the year. Taxpayers should also remember that they are legally responsible for what is on their tax return even if it is prepared by someone else. Consumers can help protect themselves by choosing a reputable tax preparer.

The IRS urges taxpayers to refrain from engaging potential scammers online or on the phone. The IRS plans to unveil a similar list of enforcement and compliance priorities this year as well.

An upcoming series of press releases will emphasize the illegal schemes and techniques businesses and individuals use to avoid paying their lawful tax liability. Topics will include such scams as abusive micro captives and fraudulent conservation easements.

Here are this year’s “Dirty Dozen” scams:

Phishing:

Taxpayers should be alert to potential fake emails or websites looking to steal personal information. The IRS will never initiate contact with taxpayers via email about a tax bill, refund or Economic Impact Payments. Don’t click on links claiming to be from the IRS. Be wary of emails and websites − they may be nothing more than scams to steal personal information.

IRS Criminal Investigation has seen a tremendous increase in phishing schemes utilizing emails, letters, texts and links. These phishing schemes are using keywords such as “coronavirus,” “COVID-19” and “Stimulus” in various ways.

These schemes are blasted to large numbers of people in an effort to get personal identifying information or financial account information, including account numbers and passwords. Most of these new schemes are actively playing on the fear and unknown of the virus and the stimulus payments. 

Fake Charities:

Criminals frequently exploit natural disasters and other situations such as the current COVID-19 pandemic by setting up fake charities to steal from well-intentioned people trying to help in times of need. Fake charity scams generally rise during times like these.

Fraudulent schemes normally start with unsolicited contact by telephone, text, social media, e-mail or in-person using a variety of tactics. Bogus websites use names similar to legitimate charities to trick people to send money or provide personal financial information. They may even claim to be working for or on behalf of the IRS to help victims file casualty loss claims and get tax refunds.

According to a great accountant, taxpayers should be particularly wary of charities with names like nationally known organizations. Legitimate charities will provide their Employer Identification Number (EIN), if requested, which can be used to verify their legitimacy. Taxpayers can find legitimate and qualified charities with the search tool on IRS.gov.

Threatening Impersonator Phone Calls:

IRS impersonation scams come in many forms. A common form is bogus, threatening phone calls from a criminal claiming to be with the IRS. The scammer attempts to instill fear and urgency in the potential victim. In fact, the IRS will never threaten a taxpayer or surprise him or her with a demand for immediate payment.

Phone scams or “vishing” (voice phishing) pose a major threat. Scam phone calls, including those threatening arrest, deportation or license revocation if the victim doesn’t pay a bogus tax bill, are reported year-round. These calls often take the form of a “robocall” (a text-to-speech recorded message with instructions for returning the call).

The IRS will never demand immediate payment, threaten, ask for financial information over the phone, or call about an unexpected refund or Economic Impact Payment. Taxpayers should contact the real IRS if they worry about having a tax problem.

Social Media Scams:

Taxpayers need to protect themselves against social media scams, which frequently use events like COVID-19 to try tricking people. Social media enables anyone to share information with anyone else on the internet. Scammers use that information as ammunition for a wide variety of scams. These include emails where scammers impersonate someone’s family, friends or co-workers.

Social media scams have also led to tax-related identity theft. The basic element of social media scams is convincing a potential victim that he or she is dealing with a person close to them that they trust via email, text or social media messaging.

Using personal information, a scammer may email a potential victim and include a link to something of interest to the recipient which contains malware intended to commit more crimes. Scammers also infiltrate their victim’s emails and cell phones to go after their friends and family with fake emails that appear to be real and text messages soliciting, for example, small donations to fake charities that are appealing to the victims.

EIP or Refund Theft:

The IRS has made great strides against refund fraud and theft in recent years, but they remain an ongoing threat. Criminals this year also turned their attention to stealing Economic Impact Payments as provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Much of this stems from identity theft whereby criminals file false tax returns or supply other bogus information to the IRS to divert refunds to wrong addresses or bank accounts.

The IRS recently warned nursing homes and other care facilities that Economic Impact Payments generally belong to the recipients, not the organizations providing the care. This came following concerns that people and businesses may be taking advantage of vulnerable populations who received the payments. These payments do not count as a resource for determining eligibility for Medicaid and other federal programs They also do not count as income in determining eligibility for these programs. See IR-2020-121, IRS alert: Economic Impact Payments belong to recipient, not nursing homes or care facilities for more.

Taxpayers can consult the Coronavirus Tax Relief page of IRS.gov for assistance in getting their EIPs. Anyone who believes they may be a victim of identity theft should consult the Taxpayer Guide to Identity Theft on IRS.gov.

Senior Fraud:

Senior citizens and those who care about them need to be on alert for tax scams targeting older Americans. The IRS recognizes the pervasiveness of fraud targeting older Americans along with the Department of Justice and FBI, the Federal Trade Commission, the Consumer Financial Protection Bureau (CFPB), among others.

Seniors are more likely to be targeted and victimized by scammers than other segments of society. Financial abuse of seniors is a problem among personal and professional relationships. Anecdotal evidence across professional services indicates that elder fraud goes down substantially when the service provider knows a trusted friend or family member is taking an interest in the senior’s affairs.

Older Americans are becoming more comfortable with evolving technologies, such as social media. Unfortunately, that gives scammers another means of taking advantage. Phishing scams linked to Covid-19 have been a major threat this filing season. Seniors need to be alert for a continuing surge of fake emails, text messages, websites and social media attempts to steal personal information.

Scams targeting non-English speakers:

IRS impersonators and other scammers also target groups with limited English proficiency. These scams are often threatening in nature. Some scams also target those potentially receiving an Economic Impact Payment and request personal or financial information from the taxpayer.

Phone scams pose a major threat to people with limited access to information, including individuals not entirely comfortable with the English language. These calls frequently take the form of a “robocall” (a text-to-speech recorded message with instructions for returning the call), but in some cases may be made by a real person. These con artists may have some of the taxpayer’s information, including their address, the last four digits of their Social Security number or other personal details – making the phone calls seem more legitimate.

A common phone scan is the IRS impersonation scam. This is where a taxpayer receives a telephone call threatening jail time, deportation or revocation of a driver’s license from someone claiming to be with the IRS. Taxpayers who are recent immigrants often are the most vulnerable and should ignore these threats and not engage the scammers.

Unscrupulous Return Preparers:

Selecting the right return preparer is important. They are entrusted with a taxpayer’s sensitive personal data. Most tax professionals provide honest, high-quality service, but dishonest preparers pop up every filing season committing fraud, harming innocent taxpayers or talking taxpayers into doing illegal things they regret later.

Taxpayers should avoid so-called “ghost” preparers who expose their clients to potentially serious filing mistakes as well as possible tax fraud and risk of losing their refunds. With many tax professionals impacted by COVID-19 and their offices potentially closed, taxpayers should take particular care in selecting a credible tax preparer.

Ghost preparers don’t sign the tax returns they prepare. They may print the tax return and tell the taxpayer to sign and mail it to the IRS. For e-filed returns, the ghost preparer will prepare but not digitally sign as the paid preparer. By law, anyone who is paid to prepare or assists in preparing federal tax returns must have a Preparer Tax Identification Number (PTIN). Paid preparers must sign and include their PTIN on returns.

Unscrupulous preparers may also target those without a filing requirement and may or may not be due a refund. They promise inflated refunds by claiming fake tax credits, including education credits, the Earned Income Tax Credit (EITC) and others. Taxpayers should avoid preparers who ask them to sign a blank return, promise a big refund before looking at the taxpayer’s records or charge fees based on a percentage of the refund.

Offer in Compromise Mills:

Taxpayers need to be wary of misleading tax debt resolution companies that can exaggerate chances to settle tax debts for “pennies on the dollar” through an Offer in Compromise (OIC). These offers are available for taxpayers who meet very specific criteria under law to qualify for reducing their tax bill. But unscrupulous companies oversell the program to unqualified candidates so they can collect a hefty fee from taxpayers already struggling with debt.

These scams are commonly called OIC “mills,” which cast a wide net for taxpayers, charge them pricey fees and churn out applications for a program they’re unlikely to qualify for. Although the OIC program helps thousands of taxpayers each year reduce their tax debt, not everyone qualifies for an OIC. In Fiscal Year 2019, there were 54,000 OICs submitted to the IRS. The agency accepted 18,000 of them.

Individual taxpayers can use the free online Offer in Compromise Pre-Qualifier tool to see if they qualify. The simple tool allows taxpayers to confirm eligibility and provides an estimated offer amount. Taxpayers can apply for an OIC without third-party representation; but the IRS reminds taxpayers that if they need help, they should be cautious about whom they hire.

Fake Payments with Repayment Demands:

Criminals are always finding new ways to trick taxpayers into believing their scam including putting a bogus refund into the taxpayer’s actual bank account. Here’s how the scam works:

A con artist steals or obtains a taxpayer’s personal data including Social Security number or Individual Taxpayer Identification Number (ITIN) and bank account information. The scammer files a bogus tax return and has the refund deposited into the taxpayer’s checking or savings account. Once the direct deposit hits the taxpayer’s bank account, the fraudster places a call to them, posing as an IRS employee. The taxpayer is told that there’s been an error and that the IRS needs the money returned immediately or penalties and interest will result. The taxpayer is told to buy specific gift cards for the amount of the refund.

The IRS will never demand payment by a specific method. There are many payment options available to taxpayers and there’s also a process through which taxpayers have the right to question the amount of tax the IRS says they owe. Anytime a taxpayer receives an unexpected refund, and a call from the IRS out of the blue demanding a refund repayment, they should reach out to their banking institution and to the IRS.

Payroll and HR Scams:

Tax professionals, employers and taxpayers need to be on guard against phishing designed to steal Form W-2s and other tax information. These are Business Email Compromise (BEC) or Business Email Spoofing (BES). This is particularly true with many businesses closed and their employees working from home due to COVID-19. Currently, two of the most common types of these scams are the gift card scam and the direct deposit scam.

In the gift card scam, a compromised email account is often used to send a request to purchase gift cards in various denominations. In the direct deposit scheme, the fraudster may have access to the victim’s email account (also known as an email account compromise or “EAC”). They may also impersonate the potential victim to have the organization change the employee’s direct deposit information to reroute their deposit to an account the fraudster controls.

BEC/BES scams have used a variety of ploys to include requests for wire transfers, payment of fake invoices as well as others. In recent years, the IRS has observed variations of these scams where fake IRS documents are used in to lend legitimacy to the bogus request. For example, a fraudster may attempt a fake invoice scheme and use what appears to be a legitimate IRS document to help convince the victim.

The Direct Deposit and other BEC/BES variations should be forwarded to the Federal Bureau of Investigation Internet Crime Complaint Center (IC3) where a complaint can be filed. The IRS requests that Form W-2 scams be reported to: phishing@irs.gov  (Subject: W-2 Scam).

Ransomware:

This is a growing cybercrime. Ransomware is malware targeting human and technical weaknesses to infect a potential victim’s computer, network or server. Malware is a form of invasive software that is often frequently inadvertently downloaded by the user. Once downloaded, it tracks keystrokes and other computer activity. Once infected, ransomware looks for and locks critical or sensitive data with its own encryption. In some cases, entire computer networks can be adversely impacted.

Victims generally aren’t aware of the attack until they try to access their data, or they receive a ransom request in the form of a pop-up window. These criminals don’t want to be traced so they frequently use anonymous messaging platforms and demand payment in virtual currency such as Bitcoin.

Cybercriminals might use a phishing email to trick a potential victim into opening a link or attachment containing the ransomware. These may include email solicitations to support a fake COVID-19 charity. Cybercriminals also look for system vulnerabilities where human error is not needed to deliver their malware.

The IRS and its Security Summit partners have advised tax professionals and taxpayers to use the free, multi-factor authentication feature being offered on tax preparation software products. Use of the multi-factor authentication feature is a free and easy way to protect clients and practitioners’ offices from data thefts. Tax software providers also offer free multi-factor authentication protections on their Do-It-Yourself products for taxpayers.

This week’s article – From IRS.gov – Click Here

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

– Tammy

– until next week.

Two New Employer Tax Credits July 15, 2020

Posted by bradstreetblogger in : Business consulting, Business Consulting, COVID, COVID-19, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Taxes, Uncategorized , add a comment

July 15, 2020                         

Many businesses that have been severely impacted by Coronavirus (COVID-19) will qualify for two new employer tax credits – the Credit for Sick and Family Leave and the Employee Retention Credit.

Sick and Family Leave – Credit for Sick and Family Leave

An employee who is unable to work (including telework) because of Coronavirus quarantine or self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis, is entitled to paid sick leave for up to ten days (up to 80 hours) at the employee’s regular rate of pay, or, if higher, the Federal minimum wage or any applicable State or local minimum wage, up to $511 per day, but no more than $5,110 in total.

Caring for someone with Coronavirus

An employee who is unable to work due to caring for someone with Coronavirus, or caring for a child because the child’s school or place of care is closed, or the paid child care provider is unavailable due to the Coronavirus, is entitled to paid sick leave for up to two weeks (up to 80 hours) at two-thirds the employee’s regular rate of pay or, if higher, the Federal minimum wage or any applicable State or local minimum wage, up to $200 per day, but no more than $2,000 in total.

Care for children due to daycare or school closure

An employee who is unable to work because of a need to care for a child whose school or place of care is closed or whose child care provider is unavailable due to the Coronavirus, is also entitled to paid family and medical leave equal to two-thirds of the employee’s regular pay, up to $200 per day and $10,000 in total. Up to ten weeks of qualifying leave can be counted towards the family leave credit.

Credit for eligible employers

Eligible employers are entitled to receive a credit in the full amount of the required sick leave and family leave, plus related health plan expenses and the employer’s share of Medicare tax on the leave, for the period of April 1, 2020, through December 31, 2020.  The refundable credit is applied against certain employment taxes on wages paid to all employees. Eligible employers can reduce federal employment tax deposits in anticipation of the credit.  They can also request an advance of the paid sick and family leave credits for any amounts not covered by the reduction in deposits. The advanced payments will be issued by paper check to employers.

Employee Retention Credit

Eligible employers can claim the employee retention credit, a refundable tax credit equal to 50 percent of up to $10,000 in qualified wages (including health plan expenses), paid after March 12, 2020 and before January 1, 2021.  Eligible employers are those businesses with operations that have been partially or fully suspended due to governmental orders due to COVID-19, or businesses that have a significant decline in gross receipts compared to 2019.

The refundable credit is capped at $5,000 per employee and applies against certain employment taxes on wages paid to all employees.  Eligible employers can reduce federal employment tax deposits in anticipation of the credit.  They can also request an advance of the employee retention credit for any amounts not covered by the reduction in deposits. The advanced payments will be issued by paper check to employers.

Need more information on how to apply? Click here

This week’s article – From IRS.gov – Click Here

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

Correction/Update to an earlier Tax Tip of the Week regarding municipal income taxes.  A local Income Tax Administrator was kind enough to send the below information to us as follows:

“H.B. 197 sets aside 718.011 of the Ohio Revised Code, stating:

…during the period of the emergency declared by Executive Order 2020-01D, issued on March 9, 2020, and for thirty days after the conclusion of that period, any day on which an employee performs personal services at a location, including the employee’s home, to which the employee is required to report for employment duties because of the declaration shall be deemed to be a day performing personal services at the employee’s principal place of work.

That said, employees who were sent home to work during the pandemic are still considered to be working at their principal place of work and not their city of residence.  That’s why employees should not have had a change in their municipal withholding from pre-pandemic times.  There are those that question the constitutionality of the executive order, so I’m sure that the State or others will address this at a later time.  Unfortunately, due to ORC Section 718, municipalities cannot pass legislation to override H.B. 197 or any section of 718.”

– until next week.

-Mark

Your Age-by-Age Checklist to Prepare for Retirement Conversations June 24, 2020

Posted by bradstreetblogger in : General, Retirement, Tax Tip, Taxes , add a comment

June 24, 2020

The question isn’t at what age I want to retire, it’s at what income.                      -George Foreman

Never have times been so interesting. Never has change occurred so fast.  We all know that time moves faster as we grow older.  However, it may not make sense to bend over backwards in an effort to fund your retirement at a young age.  But neither may it be ignored completely either.  
                           -Mark Bradstreet

What should you and your loved ones be doing to prepare for a retirement when and how you want? While the answer partially depends on whether your own personal finish line is just around the corner or decades away, there’s one thing that everyone should be doing, no matter your age: talking.

It’s important to have conversations about retirement planning early and often, but not everyone knows what to talk about or how to get started. These age-based guidelines can serve as discussion points with your loved ones to make sure you’re on track for the retirement you want.

Preparing for retirement in your 30’s

• Don’t let student loans prevent you from saving for retirement. It’s usually a mistake to think that student loan debt should be fully paid off before putting aside money for retirement. Your retirement savings need time to grow so you can achieve your goals, and investing early will pay off in the long run — even if you can’t save as much as you’d like.  The right balance will likely include payments toward both goals, with the exact amounts depending on factors like interest rates and expected returns. 

• Make sure you’re maxing out your company’s 401(k) matching contributions. Employers often match up to a certain amount of your contributions; it’s essentially free money that you could be taking advantage of! 

• Don’t leave your job without taking vesting into consideration. Many companies tie their retirement contributions to a requirement that you stay with the company for a minimum amount of time, known as the vesting period. If you leave before the allotted period of time, be aware of the financial repercussions. 

• Revisit your 401(k) contributions each time you get a raise or promotion. If you’ve set up automatic contributions, it’s important that you don’t fall into the trap of sticking to those levels indefinitely.

• Understand the power of compounding returns. The earlier you begin investing, the more time your money will have to grow. Don’t delay. 

Preparing for your retirement in your 40’s

• Prioritize paying down your high-interest debt. Whether you have credit card debt, a car loan or a home mortgage, paying interest can eat away at your ability to save money for retirement. Prioritize your highest interest debt first and work your way down until you’re debt free. 

• Don’t fall behind. Your 40’s can be a stressful time financially. Many people in today’s “sandwich generation” are squeezed by the needs of children getting ready for college and elderly parents with dwindling reserves. Try to at least keep pace with your previous level of retirement savings. 

• Start running the numbers. Making some quick calculations can help show you where different savings scenarios are likely to lead you. If you’re not sure where to start, try Lincoln Financial’s retirement calculators.

• Talk to a financial advisor to make sure you’re on the right track. “Meeting with a financial advisor can help alleviate some of the stress surrounding retirement by helping savers create a plan,” said Jamie Ohl, Executive Vice President, President, Retirement Plan Services, Lincoln Financial Group. “People who have a plan are more confident and better prepared for retirement.”

Preparing for retirement in your 50’s

• Don’t let your spending get out of control. People often find that their disposable income increases in their 50’s as they become empty nesters and their salaries peak. Instead of letting your spending increase in tandem, increase the amount of money you put into your retirement accounts and practice frugality — getting accustomed to a more luxurious lifestyle can make it more difficult to retire.

• Ask your employer about catch-up contributions. Most companies allow workers who are age 50 and above to contribute an extra $6,000 annually to their 401(k) on top of the regular contribution limits. 

• Don’t count on an “average” lifespan. “People are living longer than ever before, and they may not factor that into their retirement planning,” said Will Fuller, Executive Vice President, President, Annuities, Lincoln Financial Distributors and Lincoln Financial Network. “That makes outliving your savings a real concern for the millions of households in America that do not have any kind of income protection in place.”

• Consider purchasing an annuity to protect against uncertainty. Annuities provide you with a guaranteed income for life, safeguarding you against longevity risk and stock market risk. 

• Get your financial advisor to align with your expected retirement age. You may have an ideal retirement age in mind, but your financial advisor is best situated to help you determine whether it’s realistic and what you need to do to get there. 

Tips like these will make sure that you’re heading in the right direction, but there’s no substitute for talking through your own personal circumstances with a financial advisor every step of the way. You’re never too young or too old to get help from a professional — and if you’ve already followed the steps above, it will be easy for them to take you across the finish line.

Today’s author – Mark Bradstreet

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

– until next week.

IRS Faces Next Challenge: Reopening June 17, 2020

Posted by bradstreetblogger in : General, Taxes , add a comment

June 17, 2020

    WASHINGTON — The Internal Revenue Service cranked out $267 billion in stimulus payments in about two months, faster than many analysts expected. But challenging work lies ahead, such as opening 10 million pieces of piled-up mail and resuming a semblance of normal taxpayer service.                

    The agency, already struggling with budget cuts and reduced staff before the coronavirus pandemic hit in March, was given the monumental task of sending stimulus payments worth $1,200 for most adults and $500 per child to help Americans ride out the economic slump. Despite some hitches—like payments to dead people and debit-card envelopes that looked to some like junk mail—those payments are largely complete, the government said this week. “The IRS has taken on nearly impossible challenges and performed many of them very well,” said Rep. Kevin Brady of Texas, the top Republican on the House Ways and Means Committee.

    Now the agency is trying to slowly reopen dozens of offices around the country and recall thousands of workers as the July 15 tax filing deadline approaches.“It gets tougher from here,” said Mark Everson, a former IRS commissioner.

    Some major operations centers remain closed, and open ones aren’t running at full strength. Refunds are being processed more slowly than usual, agency data indicate. Some telephone assistance is available, but IRS officials say phone lines remain unusually busy and they are directing people to the agency’s website whenever possible. Catching up will take time.

    “If you mailed us something, especially in February, it’s gonna be a while,” said Chad Hooper, an IRS worker in Philadelphia and president of the Professional Managers Association, which represents the agency’s supervisors.

    Meanwhile, the regular tax filing season continues, postponed from the usual April 15 deadline to July 15 as part of the coronavirus relief effort. As of May 29, the IRS had received 6.5% fewer returns than it did last year and processed 13% percent fewer. That suggests many people are waiting longer than usual for refunds. Sometimes the agency’s automated filters block refunds for suspected fraud, requiring a person to check before payments are made, even on electronically filed returns that normally yield fast refunds.

    Michael Whiteley, an unemployed chef in Rochester, N.H., said he filed his tax return in March, expecting a refund of more than $4,000. Instead, he got a notice from the IRS requesting documentation to prove that his son with a different last name was his own. Mr. Whiteley, who had already spent about $500 at H&R Block for tax preparation, said he spent $40 on expedited mail delivery to send follow-up documentation to the IRS in Fresno, Calif.—an office that isn’t set to reopen until the end of June. “I’m still sitting here to this day, waiting,” he said.

    Getting back to normal will be tricky. More than half of agency employees have been working remotely, according to the House Ways and Means Committee. But about 30% have been on paid leave because of the pandemic, and those who staff phone lines generally can’t work from home. The IRS had been trying to make more employees eligible for remote work but didn’t finish doing so before the pandemic started, Mr. Hooper said.

    “Having more modern systems would have been a great thing to have prepared for prior to a thing like this,” said Andrew Moylan, executive vice president of the National Taxpayers Union Foundation, a nonprofit research group affiliated with a conservative organization. “Expect less timeliness, less ability to contact people, less ability to get your questions answered, more problems that people have to sort out.”

    Reopening will be uneven for an agency with offices scattered across the country. Major offices in Utah, Texas and Kentucky reopened this week for employees who can’t work from home. Next come eight states and Puerto Rico, including campuses in Atlanta and Fresno, and that phase could bring back as many as 12,500 workers who aren’t eligible to work remotely. Offices in places with tighter restrictions—including Pennsylvania, Washington, D.C., New York and Maryland—aren’t yet scheduled to reopen.

    Different campuses do different types of work. Many employees have very specialized skills handling certain types of tax returns, creating a complicated management challenge to restore full service. “This is not a McDonald’s where you can move a person from the register to the to-go window,” said Mr. Everson, now vice chairman of Alliantgroup LP.

  The IRS hasn’t restarted services that require face-to-face meetings with the public, such as taxpayer assistance centers and some audit and collections operations. That is a safety concern for taxpayers and the government. Years of hiring freezes and the security of public-sector jobs mean the IRS has an aging workforce that is more susceptible to Covid-19. Employees remain anxious about the risks posed by taking public transportation, being in enclosed facilities with hundreds of co-workers and whether their work stations will be consistently and properly cleaned and disinfected,” said Tony Reardon, president of the National Treasury Employees Union, which represents front-line IRS workers.

    IRS Commissioner Charles Rettig, in a memo to employees, said their health and safety was the agency’s priority. In a statement to The Wall Street Journal, Mr. Rettig said employees worked around the clock in challenging circumstances to provide more than 159 million payments. “As we continue a phased-in reopening, we will do everything possible to accelerate our operations and enhance taxpayer services and processing of refunds,” he said.

    There are other challenges. In March, the IRS announced its “People First Initiative,” suspending some enforcement and collection through July 15 to help taxpayers struggling with unemployment and disruption. At some point, the agency will shift back toward enforcement.

    When will that happen? “It’s going to be a judgment call,” said Diana Erbsen, a lawyer at DLA Piper in New York who is chairwoman of the agency’s advisory council. “It’s not going to be an on-off switch.”

This week’s Author – Mark Bradstreet

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

– until next week

Tax Tip of the Week | How is Hobby Income Taxed? February 12, 2020

Posted by bradstreetblogger in : 2019 Taxes, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Taxes , add a comment

February 12, 2020

The hobby world has been turned upside down. In the past, hobby expenses were deducted to the extent of hobby income. Starting with 2019 and moving forward, hobby expenses are no longer deductible but your hobby income is fully taxable. Why? I have no idea. Hobbyists should be making whatever efforts necessary to convert their hobby to a business. Unlike hobby expenses, business expenses are deductible.  

                                -Mark Bradstreet

If you earn money from a hobby, you must report it as income on your federal income tax return. But if your hobby turns into a business, you may be eligible to take business deductions as well.

If you’re like most people, you probably have at least one hobby.

Unless your hobby’s mining for cryptocurrencies, you may not profit much from it. But you could still have at least a little hobby income coming in. If you do, you’re probably wondering: How is hobby income taxed?

The answer: You must pay taxes on any money your hobby makes, even if it’s just a few dollars. The good news is, if you incurred hobby expenses, you might be able to deduct them. It’s important to know how to declare hobby income, how to deduct hobby expenses and how to know if your hobby’s a business. You can find out about the rules right here.

Is it a hobby, or is it a business?

First things first — are you pursuing a hobby or running a business? Generally, if you’re doing something with the intention of making a profit, that’s a business, according to the IRS. A hobby is something you do for sport or recreation, and not for the objective of making a profit.

Some additional factors the IRS considers when defining a hobby versus a business include:

•    Do you depend on the income from your hobby?
•    Do you conduct your hobby like a business, maintaining meticulous records?
•    Have you taken steps to make your hobby more profitable?
•    Do you (or anyone who’s advising you) have the knowledge you would need to conduct your hobby as an actual business?
•    Can you expect to turn a profit from appreciation of assets you use in your hobby?

Maybe you answered “no” to all of the questions above. Sometimes, however, your hobby isn’t just for fun and you decide to try to make a living doing what you love. If your hobby becomes a business in the eyes of the IRS, the rules change. Check out the IRS Small Business and Self-Employed Tax Center if you find that your hobby has turned into a business.

You must declare hobby income

The IRS wants you to declare all your hobby income, even if it’s a small amount of money.

“If your hobby or side business has a net profit, you have to pay income taxes on that net profit, even with the new tax law,” says Irene Wachsler, a CPA at Tobolsky & Wachsler CPAs LLC in Canton, Massachusetts.

If you file your taxes using Form 1040, you’ll typically report your hobby income on Line 21, labeled “Other income.” While this is the simplest approach for most situations, there’s an alternative if you’re a collector.

If your hobby income comes from selling collectibles at a profit, you may report income from sales, including stock sales, on Schedule D. Reporting profits on a Schedule D means you could be taxed at capital gains rates instead of ordinary income tax rates.

Hobby expenses

Most hobbies — even those that earn you income — also cost money. Prior to the 2018 tax year, you could deduct hobby expenses equal to your hobby income. For tax years after 2018, this deduction is no longer available.

Since tax reform has significantly increased the standard deduction for 2018, you may be thinking you’ll likely lose the ability to deduct hobby expenses if it no longer makes sense for you to itemize. In fact, it doesn’t matter whether you do or don’t itemize — you’ve lost the deduction for hobby expenses in 2018 anyway because tax reform removed the miscellaneous deduction.

“Under the new tax reform bill, there is no place to deduct the expenses, so income will be recognized but the expense will not, starting in 2018,” says Alan Pinck, an enrolled agent and founder of A. Pinck & Associates, San Jose, California.

When does your hobby become a business, and why does it matter?

If your hobby becomes a business, you’re subject to a whole different set of tax rules.

First, you’ll typically have to declare income on Schedule C and pay both income tax and self-employment taxes (self-employment taxes include taxes for Social Security and Medicare, which an employer normally pays half of when you earn wage income). You can also deduct losses from a business, even if those losses exceed income the business earns, which differs from hobby losses.

It may seem tempting to classify your hobby as a business so you can deduct all your expenses, but proceed with caution — as mentioned earlier, the IRS uses specific criteria to differentiate a hobby from a business.

“If the activity makes a profit during at least three out of the last five years, the IRS will generally consider it a business,” Pinck explains, noting that the rules change if horses are involved.

Still, if you decide you do want to turn your hobby into a business and reap the tax benefits of business deductions, Wachsler recommends you keep a log showing your attempts to participate materially in the business.

Your log could include details on your efforts, including advertising, meetings, trying to obtain income or sell services, mileage logs and work logs. Of course even if you make an effort, the IRS may still decide your “business” isn’t really a business at all if you suffer persistent losses year after year.

Bottom line

Now that you know how hobby income is taxed, it’s up to you to decide if making money doing something for fun is worth the potential tax ramifications. While declaring income earned from your hobby may seem like a hassle — especially since you can’t deduct expenses after 2017 — you don’t want to get in trouble with the IRS for not reporting all your income.

Be sure to follow the rules for paying taxes on any money your hobby earns, and be sure you understand the differences between a hobby and a business. If the IRS decides you incorrectly classified your hobby as a business or vice versa, you could face additional taxes, penalties and interest.

Credit Given to: Christy Rakoczy Bieber

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

Today’s author – Mark Bradstreet

–until next week.

Tax Tip of the Week | How to do 1031 Exchanges to Defer Taxes February 5, 2020

Posted by bradstreetblogger in : 2019 Taxes, General, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Taxes , add a comment

Like-kind tax free exchanges aka Internal Revenue Code Section 1031 are one of the most valuable yet underutilized sections of the IRC (the last major tax law change eliminated 1031 exchanges for anything but real estate).  We have prepared thousands of individual income tax returns and only a very small fraction of those with commercial and residential real estate sales use Section 1031.  Why?  I speculate lack of 1031 education is the primary culprit.  Also, the people that are aware simply don’t wish to tackle its complexities.  Its rules are unforgiving and the deadlines are engraved in stone as the accompanying article discusses.  However, it benefits may be significant.

                                    -Mark Bradstreet 

The Definition of Like-Kind Properties Has Changed Over the Years

The time-worn saying “Nothing is certain but death and taxes” is only half true for a savvy American taxpayer who is planning the sale of an investment or business property. Since capital gains tax on your profits could run as high as 15 percent to 30 percent when state and federal taxes are combined, why not take the necessary steps to avoid this loss? A big tax bite could wipe out money you could use for future investments.

Enter the 1031 tax-deferred exchange. To many taxpayers, this is like money dropping from the skies.

1031 Exchanges Defer Taxes

The 1031 Exchange has been cited as the most powerful wealth-building tool still available to taxpayers. It has been a major part of the success strategy of countless financial wizards and real estate gurus. Taking its name from Section 1031 of the Internal Revenue Code, a tax-deferred exchange allows a taxpayer to sell income, investment or business property and replace it with a like-kind property.

Capital gains on the sale of this property are deferred or postponed as long as the IRS rules are meticulously followed. It is a wise tax and investment strategy as well as an estate planning tool. In theory, an investor could continue deferring capital gains on investment property until death, potentially avoiding them all together.

1984 Legislation Changed Some Aspects

In the early days of “like-kind exchanges,” the term was taken quite literally and often posed difficulties. For instance, if you owned a three-story brick apartment building that you wanted to sell through a 1031 exchange, you would have to find another three-story brick apartment building whose owner wanted to swap. Then the two of you would meet, and the exchange would take place.

3 Saving Habits to Steal and 3 to Skip

In the past, there were no time constraints on the exchange. The IRS demanded stricter controls on the process, which resulted in Congress passing in 1984 Section 1031(a). This legislation limited deferred exchanges, further defined “like-kind” property and established a timetable for completing the exchange.

Qualifying

Real estate property held for business use or investment qualifies for a 1031 Exchange. A personal residence does not qualify and, generally, a fix-and-flip property also doesn’t qualify because it fits into the category of property being held for sale. Vacation or second homes, which are not held as rentals do not qualify for 1031 treatment; however, there is a usage test under Paragraph 280 of the tax code that may apply to those properties. A tax expert should be consulted in this case.

Land, which is under development, and property purchased for resale do not qualify for tax-deferred treatment. Stocks, bonds, notes, inventory property, and a beneficial interest in a partnership are not considered “like-kind” property for exchange purposes.

To qualify as a 1031 exchange today, the transaction must take the form of an “exchange” rather than just a sale of one property with the subsequent purchase of another. First, the property being sold and the new replacement property must both be held for investment purposes or for productive use in a trade or a business. They must be “like-kind” properties.

The following types of real estate swaps fit the requirement for a qualified exchange of “like-kind” property:

•    An office in exchange for a shopping center
•    A shopping center in exchange for land
•    Land in exchange for an industrial building
•    An apartment building in exchange for an industrial building
•    A single family rental in exchange for a tenants in common (TIC) property

Today, you could exchange that brick apartment building for raw land, a warehouse, or a small office building. However, there are strict time constraints which must be met, or the 1031 Exchange will not be allowed, and tax consequences will be imposed.

Prior to 1984, virtually all exchanges were done simultaneously with the closing and transfer of the sold property (Relinquished Property), and the purchase of the new real estate (Replacement Property). In addition to the problems encountered when trying to finding a suitable property, there were difficulties with the simultaneous transfer of titles as well as funds. Not so today.

The delayed 1031 Exchange avoids those pre-1984 problems, but stricter deadlines are now imposed. A taxpayer who wants to complete an exchange, lists and markets property in the usual manner. When a buyer steps forward, and the purchase contract is executed, the seller enters into an exchange agreement with a qualified intermediary who, in turn, become the substitute seller. The exchange agreement usually calls for an assignment of the seller’s contract to the Intermediary. The closing takes place and, because the seller cannot touch the money, the Intermediary receives the proceeds due to the seller.

Exchanges Carry Time Restrictions

At that point, the first timing restriction, the 45-day rule for Identification, begins. The taxpayer must either close on or identify in writing a potential Replacement Property within 45 days from the closing and transfer of the original property. The time period is not negotiable, includes weekends and holidays, and the IRS will not make exceptions. If you exceed the time limit, your entire exchange can be disqualified, and taxes are sure to follow.

Types of Replacement Properties to Identify:

1.    Three properties without regard to their fair market value.
2.    Any number of properties as long as their aggregate fair market value at the end of the identification period does not exceed 200 percent of the aggregate fair market value of the relinquished property as of the transfer date.
3.    If the three-property rule and the 200 percent rule is exceeded, the exchange will not fail if the taxpayer purchases 95 percent of the aggregate fair market value of all identified properties.

What Is Boot?

Realistically, most investors follow the three-property rule so they can complete due diligence and select the one that works best for them that will close. Generally, the goal is to trade up to avoid the transfer of “boot” and keep the exchange tax-free.

“Boot” is the money or fair market value of any additional property received by the taxpayer through the exchange. Money includes all cash equivalents, debts, liabilities to which the exchanged property is subject. It is “non-like-kind” property, and the rules governing it during the exchange are complex. Suffice it to say, without expert advice, receiving “boot” can result in taxes.

Subject to the 180-Day Rule

Once a replacement property is selected, the taxpayer has 180 days from the date the Relinquished Property was transferred to the buyer to close on the new Replacement Property. However, if the due date on the investor’s tax return, with any extensions, for the tax year in which the Relinquished Property was sold is earlier than the 180-day period, then the exchange must be completed by that earlier date. Remember, a portion of this period has already been used during the Identification Period. There are no extensions and no exceptions to this rule, so it is advisable to schedule the closing prior to the deadline.

Since the law requires that the taxpayer not touch the proceeds from the first transaction, the Qualified Intermediary acquires the Replacement Property from the seller at closing and after the transaction is completed, then transfers it to the taxpayer.

Are Not for Do-It-Yourself Investors

It is a basic description of how a successful 1031 Exchange works. Depending upon the taxpayer’s situation, the type of property relinquished, and the characteristics of the Replacement Property, other aspects of the Exchange may be involved. Its completion may become complex, and experts should always be consulted. This is no task for a “do it yourself” investor.

Using the power of the 1031 Exchange to build and preserve wealth and assets, generate cash flow from investments, restructure, diversify and consolidate real estate holdings is the right of every owner of investment property in the United States. American taxpayers should never have to pay capital gains taxes on the sale of their investment property if they intend to reinvest those proceeds in more investment property.

Today’s author – Elizabeth Weintraub

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

–until next week.