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Tax Tip of the Week | Sales Tax (Where You Have No Physical Presence) February 13, 2019

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

Sales Tax ( Where You Have No Physical Presence)

I would rather have an IRS audit than a sales tax audit for a multitude of reasons that I won’t bore you with. Just take my word for it! Too many taxpayers are more diligent with meeting their IRS tax compliance than with their sales tax requirements.  You better be diligent with both of these taxes or you have a lot to lose!

Excerpts from an article follows on South Dakota v. Wayfair, Inc., U.S. (2018).  As businesses increasingly use internet to sell, their sales tax compliance has become even more cumbersome and complex.

I have spared you a lot of history in this article and just shown the author’s FAST FACTS.  You may also go directly to the online article if you are interested in more details.

-Mark Bradstreet

Credit to Rich Molina, CPA, CPA Voice, The Ohio Society of Certified Public Accountant, Sep/Oct 2018

FAST FACTS:

1.    “Reversing precedent, the U.S. Supreme Court finally upheld a requirement that retailers withhold and remit sales taxes for purchases made by customers in states in which the retailers have no physical presence.
2.    South Dakota, like other states, experienced a substantial decline in tax revenues as more and more of its residents purchased goods and services online from out-of-state retailers.
3.    On a national level, states were losing $8-33 billion of tax revenue per year in uncollected sales taxes by out-of-state sellers. In addition, at the time the Supreme Court rendered the Quill decision in 1992, less than 2% of Americans had internet access while that number is 89% today.
4.    The court’s holding has evolved along with modern day commerce just as the court is finding itself having to adapt to new areas in other parts of the law, including privacy in the digital age.”

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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.

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | 11 Tax Deductions Every Independent Contractor Should Know About February 6, 2019

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

11 Tax Deductions Every Independent Contractor Should Know About

    Tax Day 2019 is Monday, April 15.
•    If you work as an independent contractor, you are entitled to certain tax deductions for your business expenses.
•    Even if your contract work is just a side gig, you’re still running a business, so it’s important to track your expenses.
•    We spoke with CPA and certified financial planner Harvey I. Bezozi about the deductions that independent contractors can use to reduce the amount of tax they owe.

With the rise of the gig economy, many more people now have to consider the tax implications of working as independent contractors. When you are an independent contractor, the IRS considers you a business owner, even if you contract full-time for one client.

Independent contracting comes with additional tax burdens (e.g., there is no employer contribution, so the entire payroll tax burden falls to you). On the other hand, you can deduct expenses that you couldn’t take as an employee.

Harvey I. Bezozi, a CPA and CFP, has worked with small businesses for more than three decades. He shared with us this list of tax deductions that every independent contractor should know about.

1.    First, form an entity
Before he talked about deductions, Bezozi said, “When somebody starts a business, especially if they’re new at it, they’ll usually become a sole proprietor. That’s mistake number one.”

He suggests that you form an LLC, S-corporation, or some other business entity, even if your business is very small. He believes that the tax benefits and the protection from personal liability are worth the extra paperwork.

2.    Use of your car for business
As an employee, your work commute is not tax deductible. “But as an independent contractor, it’s no longer a commute,” Bezozi said.

If you’re going from your office to your client’s office, keep a log and take your mileage off your taxes. You can also deduct transit expenses for travel to a client.

3.    Home office dos and don’ts
“There’s no reason why you can’t deduct that portion of the apartment and/or home expenses, based on square footage” that you use for a home office, Bezozi said. To be deductible, your home office “has to be regular and exclusive use and your principle place of business,” he added.

4.    Equipment purchases
The cost of any electronics you use in your business can be written off on your taxes. If a device has mixed personal and business use, your deduction is proportional. If 30% of your phone usage is for business calls and emails, you can deduct 30% of the cost of the phone and your monthly bill, Bezozi said.

Bezozi also noted that if you’re super conscious of cyber security, you might want to have separate devices for personal and business use, especially if you have employees.

5.    Insurance (and if you don’t have it, you should)
“Generally, you want to have some kind of professional liability insurance,” Bezozi said. “You may want to have cybersecurity insurance. Eventually you want to have disability insurance. That’s something that people don’t think about.” All these insurance premiums are deductible.

If you work alone, your health insurance premiums might be deductible, under the same IRS rules that govern the deductibility of healthcare expenses for individuals.

6.    Retirement savings
If you work as an independent contractor an IRA, SEP IRA, or solo 401(k), will allow you to defer taxes on that income until you retire, Bezozi noted. The amount you contribute comes off your taxable income.

7.    Business travel
“Most people that start out in business, especially in the gig type of economy, are going to be looking to meet people,” Bezozi said. Whether you go across town to a networking event or across the country to a professional conference, your travel expenses can be deductible.

8.    Business meals
“When you meet a client, if you have a meeting over coffee or lunch or a fancy dinner, you can write off the cost of half of that meal,” Bezozi said. The tax rules have changed, however, so you non-meal entertainment expenses are no longer deductible. “If you take a client to a concert, you can no longer deduct that,” he noted.

9.    Training and subscriptions
“Anything to make you better and more knowledgeable in what you do now” is deductible, according to Bezozi. The training must be “something that enhances your ability in your current career but doesn’t get you ready for a different career,” he added. He noted that subscriptions to professional magazines and apps and software that you use in your business are also deductible business expenses.

10.    Client gifts

Gifts to your clients are deductible, up to a point, Bezozi said. If you send a year-end gift basket to an individual client, you can deduct up to $25. If the gift is for the company as a whole (a coffee table book, for example), the limit is higher.

11.    Credit-card interest
If you charge business expenses on a credit card, Bezozi said, “the portion of interest that relates to business expenditures can be deductible.” He noted that there is a limit to the deductibility of this interest, but the limit is high enough that it won’t apply to most independent contractors.

Credit given to:  Laura McCamy  Business Insider   January 10, 2019

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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.

This Week’s Author – Mark C. Bradstreet, CPA

-until next week

Tax Tip of the Week | 11 Bizarre Tax Laws January 30, 2019

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

11 Bizarre Tax Laws

On a somewhat lighter note let’s look this week at some rather absurd tax laws in some of our own American states. By no means is this list all inclusive. The ones that follow are excerpts from “20 Bizarre US State Taxes” authored by Jamie Young published on March 23, 2018.  

– Mark C. Bradstreet

“Despite America’s quirks, it can seem fairly normal when compared with other countries. Take taxes, for example: Even when it comes to the most mundane of topics, countries overseas can devise some truly bizarre charges and fines. For example, Ireland and Denmark effectively tax cow flatulence by taxing cattle owners up to $110 per cow.

But it’s not just distant foreigners who are coming up with strange tax laws; Americans are just as creative — and ridiculous. If you live in any of these states, watch out for bizarre state taxes that could be affecting your budget, as well.

1. Kansas: Amusement Tax
Although many states charge something called an Amusement Tax, this one takes the cake. If you take a hot-air balloon ride in the state of Kansas, it’s considered transportation and tax-free. But if you want the security of staying tethered to the ground while in a hot-air balloon, that will cost you 6.5 percent since you’re just there to be amused. When you’re tethered to the ground, you are, unlike Dorothy, very much still in Kansas — and it’ll cost you.

2. Maryland: Flush Tax
In an attempt to protect the Chesapeake Bay, the Chesapeake and Atlantic Coastal Bays Restoration Fund in Maryland is supported by a $5 monthly fee on sewer bills and an equivalent $60 annual fee on septic system owners. Flushing your toilet in Maryland is now twice as expensive as it used to be.

3. Pennsylvania: Air Tax
Anything that comes out of compressed air vending machine or vacuuming vending machine is subject to a sales and use tax. That’s right, Pennsylvania taxes air. Vending machines located on schools or church property, however, are exempt.

4. Colorado: Coffee Cup Lid Tax
When you go to the coffee shop to get your morning fix, you probably take the lid for your coffee for granted — not in Colorado, though. All nonessential packaging in Colorado is taxed an extra 2.9 percent. Your coffee cup is essential, sure, but the lid that goes on it is not. Extra taxes are also charged on stir sticks, cup sleeves and straws.

5. Maine: Blueberry Tax
Maine’s state berry is the blueberry — which is considered a superfood — and Maine is almost the sole provider of blueberries to all of the U.S. So the state charges an extra tax for anything related to the blueberry industry. This tax probably isn’t going to break your bank, but if you grow, purchase, sell, handle or process blueberries in the state of Maine, prepare to pay 1.5 cents per pound.

6. Nevada: Loud Live Music Tax
Nevada businesses must pay a 5 to 10 percent sales tax on admissions, food, drink and merchandise to the state whenever there is live entertainment going on. This can include everything from animal stunt performances to comedy and magic. Uncompensated, short performances, however, are tax-free — so you can sing your heart out, for free.

7. New York: Bagel Tax
New York residents might want to switch to toast for breakfast. Any bagel that has been sliced or prepared with toppings, like cream cheese or lox, is subject to an 8.875 percent sales tax. If it’s whole or sliced without toppings or spread, however, you can eat it tax-free — unless, that is, you eat it while you’re still in the store; then you’ll also be charged tax.

8. Indiana: Cake Decorating Tax
When creating a decorated cake in Indiana, bakers can expect to pay a tax on the finishing touches. Although frosting in containers or tubes is tax exempt, cake decorations are not. According to the state of Indiana’s tax laws, frosting is not in a “bar, drop or piece” and does not qualify as candy, but cake decorations are considered candy because they are “a preparation of sweeteners and flavorings in a drop or piece form.”

9. Texas: Belt Buckle Tax
If you want to be a cowboy, or at least dress like one, there aren’t any extra taxes on cowboy boots, hats or belts. But a belt buckle is another story. In Texas — where they’re quite popular — there’s a 6.25 percent sales tax on belt buckles because they’re not considered clothes. If you’re willing to wait, you can buy it tax-free on the state’s annual sales tax holidays.

10. Tennessee: Litigation Tax
Just to add insult to injury, a tax of up to $29.50 can be levied on residents involved in criminal and civil court proceedings. Juveniles are generally exempt.

11. Arkansas: Tattoo Tax
Be prepared to pay extra sales tax in Arkansas if you’re thinking about getting a tattoo — or even electrolysis. Though it’s unlikely any rebellious teens got in trouble for coming home without body hair, electrolysis treatments are taxed an extra 6 percent along with tattoos and body piercings.”

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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.

This Week’s Author – Mark C. Bradstreet, CPA

-until next week

Tax Tip of the Week | Estimated Tax Payments January 23, 2019

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

Estimated Tax Payments

Clients who are starting a business often ask “Do I need to make estimated payments?”  The answer, as with most tax questions, is “It depends”.  While the IRS, states and cities each have their own set of rules for making estimated payments, this article will discuss only the federal provisions for individuals.

In general, you are required to pay estimated tax if:

1. You expect to owe at least $1,000 after subtracting any withholding and refundable credits you are entitled to receive, and

2. You expect your withholding and refundable credits to be less than the smaller of:

The above percentages are commonly known as safe-harbors.  These percentages may be different for farmers, fisherman, or high income taxpayers.  For farmers and fisherman, if at least two-thirds of your income is from farming or fishing, you can substitute 66 2/3% for the 90% shown above.  For higher income taxpayers, if your adjusted gross income (AGI) is over $150,000, you will need to pay in 110% of the prior year tax instead of 100% as shown above to avoid penalties.  For 2017 and earlier years, AGI was the bottom line on the first page of the Form 1040.  Starting in 2018, AGI is line 7 on the second page of the 1040 form.

If, in addition to your business income, you also receive salaries and wages, you may be able to avoid paying estimates by having your employer bump up your withholding.  We often see higher income W-2 earners owing with their tax returns because they do not have enough tax withheld.  In these cases, if nothing is done to increase withholding, and no estimates are paid, the requirements above can cause a penalty on the return, even though the taxpayer has no other outside income.

Another safe-harbor that exists stems from having no tax liability for the prior year.  In that case, you are not required to make estimated payments for the current year.  However, if you make no estimated payments, you need to be prepared to pay any balance due when your returns are filed, plus you will owe the first estimate that will be due for the next year, both of which will be due April 15th.  So plan ahead!

If you do find yourself in the position of having to make estimated payments, the due dates are on the 15th of April, June, September and January, unless weekends come into play, in which case, they are due the following Monday.  Payments can be made in several ways including online at IRS.gov/payments by using a debit or credit card, electronic funds withdrawal, or through the electronic federal tax payments system, known as EFTPS (you must have an account set up for this one).  You can also pay by phone or through a mobile device by downloading the IRS2Go app.  And yes, you can still pay the old-fashioned way by sending in a payment voucher, Form 1040-ES, with a check or money order payable to U.S. Treasury.

For more information, please see your tax advisor, or go to the IRS website at www.IRS.gov.  Thank you for all of your questions, comments and suggestions for future topics. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

This week’s author – Norman S. Hicks, CPA

–until next week.

Tax Tip of the Week | Escaping Income Tax on Real Estate Gains is Entirely Possible January 16, 2019

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

Escaping Income Tax on Real Estate Gains is Entirely Possible

With the proper tax planning and foresight, use of Internal Revenue Code Section 1031 offers the opportunity of not paying any income tax on real estate property gains.

The “1031” tax break aka a “like kind” exchange is one of the most commonly overlooked tax breaks.

Using 1031 exchanges as explained below enable a taxpayer to escape paying income tax on a real estate gain by effectively trading their properties for more expensive ones. The gains are deferred through a basis reduction in the newly acquired property. However, if this property is held at death and the total estate value is below the current taxable threshold of roughly $11,000,000; then, your beneficiaries receive the real estate at its “fair market value” at date of death which becomes their new “stepped-up basis.” The difference between the basis (even after depreciation) and its fair market value at date of death remains untaxed.

However, there are some “mines in this minefield” that must be avoided. Further explanation is offered below by Robyn A. Friedman (WSJ, November 16, 2018).

-Mark Bradstreet, CPA

The tax overhaul enacted last year made a lot of changes, but one provision cherished by real-estate investors survived:  so-called 1031 exchanges.

It’s the name for a tax break that lets you defer capital-gains taxes on the sale of a property used for business or investment if you reinvest the proceeds in another business or investment property. It’s often used by large real-estate investment companies, but individual investors – even those who own a single rental-income property – can take advantage of it as well. The “1031” name refers to Section 1031 of the U.S. tax code.

“You don’t have to be a professional investor to use this tax break to your advantage,” says Andy Weiser, a real-estate agent with Better Homes and Gardens Florida 1st Real Estate in Fort Lauderdale, Fla. “You just have to be a smart investor.”

One typical way small investors use the provision is by selling one rental property and buying another. Mr. Weiser recently represented an investor who did just that. The investor sold a two-bedroom rental property in San Antonio, for what would have been a $125,000 gain. If he had simply taken the cash, he would have paid capital-gains tax. But instead, under the 1031 rules, he was able to defer paying those taxes by using the proceeds to buy another rental property, a $395,000 two-bedroom waterfront condominium that he bought in Fort Lauderdale.

The provision only applies to properties held for business or investment; a personal residence is not eligible for the tax break. You also must complete certain steps at set times. You have 45 days from the date of the sale of the old property to identify potential replacement properties. And you must acquire the new property no later than 180 days after the sale.

Before the tax code overhaul this year, a variety of transactions – not just real estate – qualified for 1031 exchange treatment. These transactions also called “like-kind exchanges,” were allowed for any type of property used for business or held as an investment, including exchanges of personal or intangible property such as artwork or other collectibles. The new rules now limit exchanges to real estate only.

But many types of real estate qualify. An investor can exchange a single-family home held for investment in New York for a farm in Colorado or a small strip shopping center in Las Vegas, as long as all those properties are used for business or investment purposes.

Many investors engage in successive 1031 exchanges, effectively swapping each of their properties into bigger and better ones. Ultimately, when the investor dies, the heirs who inherit the last property receive a “stepped-up basis,” which means that the property is valued at the market value at the time of death. If the heirs sell it then, there’s likely no gain – and hence, no capital-gains taxes due – on the sale.

“You keep buying and selling and roll the profits from one to the next,” said David Goss, co-founder and managing principal of Interra Realty, a brokerage in Chicago. “And when you die, and your kids inherit them, they get a stepped-up basis so the capital gains are gone forever.”

•    Beware of the personal property. Personal property is excluded from like-kind exchanges. So, if you’re exchanging an apartment building and it has appliances, you need to determine how much of the value is attributable to the building and how much for the appliances. “That’s an area where you have to watch out,” Mr. Moskowitz says.

Robyn A. Friedman, WSJ, Friday, November 16, 2018

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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.

This Week’s Author – Mark C. Bradstreet, CPA

–until next week

Tax Tip of the Week | Stop Helping Cybercriminals Steal Your Info January 9, 2019

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

Stop Helping Cybercriminals Steal Your Info

We all face computer security threats on a daily basis. Some attempts by cybercriminals are outright obvious! But, others, admittedly are ingenious, sneaky (see (2) below – that is a new one for me) and can literally put you out of business. An IT instructor I had a few weeks ago said he could hack our hotel’s Wi-Fi and be on our cell phones in 2-3 minutes. He said if he was really good it could be done in 30 seconds. Ouch! Also, too many people use passwords that are simply too short and too easy to guess. Please read on…

-Mark C Bradstreet, CPA

“When you take a moment to think about the various data breaches and identity theft scams that have occurred over the past few years – from Equifax to WannaCry – there tends to be a common theme:  These wounds are self-inflicted.

Because we face data security threats every day, it helps to know the most common tactics cybercriminals use and how to prevent falling victim to them.

(1) Spear phishing
Phishing scams are one of the most common and successful methods of data theft, which makes sense. They target the single most vulnerable part of the security apparatus:  People. And there’s one subset of phishing that is particularly effective.

“Spear phishing” specifically targets individuals by using personal information to convince the victim that the criminals are a familiar entity – an employer, family member, or favorite retailer – to gather private data: bank accounts, credit card information, and Social Security numbers are common requests. Luckily, there are usually a few clues that the communication isn’t legit and knowing how to spot them can protect you from being a victim.

First, businesses will not request your bank account number or Social Security number in an email. If someone on the phone is claiming to be from a collection agency, you can perform a few quick Google searches to verify their identity. Second, a legitimate agency will never ask for payment via cryptocurrency or gift cards. Third, email and letter phishing scams tend to feature glaring spelling and grammar issues.

The other, most obvious way to avoid email phishing scams is to avoid opening unsolicited emails and, on those occasions when you do open them, never clicking links or downloading attachments. If you’re worried about not being able to receive files from customers or coworkers, secure client portals and shared folders are viable options.

(2) Evil Twins
Evil twin attacks are when cybercriminals create a fake wireless access point that impersonates a real Wi-Fi- network, enabling cybercriminals to directly monitor victims’ traffic or redirect victims to websites containing malware. Criminals usually set up shop in high-foot-traffic areas that advertise free Wi-Fi, like airports, coffee shops and shopping malls. Unfortunately, there’s no way to know which “hotel Wi-Fi” is legit.

If you don’t want to self-regulate what you do while connected to public Wi-Fi, one solution is a virtual private network (VPN) service. When you use a VPN, your device’s traffic is encrypted, which – while not impenetrable – places a barrier between your data and would-be cybercriminals.

(3) Ransonware
Stop me if you’ve heard this one:

You’re working late on a project that’s due tomorrow morning, but a Windows notification asking to download and install an operating system update stops you dead in your tracks. Rather than taking a break that could last an hour or more, you click “Remind Me Later” and keep working on that deadline. Six months later, the update is waiting patiently for you to find the time. It’s essential for us to find the time to update our operating systems because such updates often include security patches that can help prevent attacks that compromise our cybersecurity.

Ramsonware holds your computer’s data hostage until you make a payment to the cybercriminals responsible for the attack. Generally, if you don’t make a payment by a specific date, all your data is deleted. But even if you pay the ransom, there’s no guarantee you’ll get your data back – and since most of these scams ask for payment in Bitcoin, it’s not possible to simply reverse the charges.

The May 2017 WannaCry ransomware attack succeeded because people failed to update their Windows operating system. Before installing the update, Windows users were vulnerable to an exploit that didn’t even require they actively download malware to their system – even worse, if one computer on a network became infected, it was likely that WannaCry would spread to others. Here’s the rub:  Microsoft issued a fix for supported versions of Windows two months before the attack took place.

(4) Wrapping things up
What else can you do to protect your data?

Aside from installing security software like antivirus and antispyware programs, you probably need to address your password hygiene.The problem with passwords is if they’re easy to remember, they’re usually not very secure. Since every account needs a strong unique password, a password manager can be a relatively easy solution.

Password managers randomly generate and store passwords associated with your accounts, and some will even auto fill website forms with all of your login information. In the event of an account compromise, you just generate a new password. When you use a password manager, you only need to remember the password that logs you into that service.

Criminals have many ways to get their hands on your private information. Let’s stop making their job easier.”

Credit to Ryan Norton, CPA Voice The Ohio Society of Certified Public Accountants  – September/October 2018. Ryan is a GruntWorx contributor. This originally appeared on the Boomer Consulting, Inc. blog on June 14, 2018.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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.

This Week’s Author – Mark C. Bradstreet, CPA

–until next week

Tax Tip of the Week | Students Get Help From Judges January 2, 2019

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

Students Get Help From Judges

To give you an idea of the pervasiveness of this issue, student loan debt “has eclipsed credit cards as the largest source of consumer debt after mortgages.”  Please read the write-up below for potential relief for some former students.

Mark Bradstreet, CPA

“More bankruptcy judges are throwing lifelines to people struggling to repay their student loans after decades of refusing to consider any sort of relief.

In interviews with the Wall Street Journal, more than 50 current and former bankruptcy judges, frustrated at seeing borrowers leave federal courtrooms with six-figure debts, say they or their colleagues are more open to chipping away at the decades-old guidelines that determine how such debt is treated.

“If the law’s not going to be improved by Congress, we have to help these young people who are drowning in student loan debt, said U.S. Bankruptcy Court Judge John Waites in South Carolina.

Outright cancellations remain rare, but judges said they have other tools at their disposal, including asking lawyers to represent borrowers for nothing. The lawsuits can cost $3,000 to $10,000 and take years.

Other judges are embracing debt-relief techniques that don’t fully erase student loans but make repayment more affordable by, for instance, canceling future related tax bills. The popularity of these relief strategies could get a boost from a panel of professors, judges and advocates who are studying failures in consumer bankruptcy law and plan to release a report next year.

Hundreds of thousands carry student debt in the U.S. – the total has more than doubled over the past decade to $1.4 trillion – nearly all backed by the federal government. It has eclipsed credit cards as the largest source of consumer debt after mortgages. Almost every other type can be extinguished in bankruptcy, but standards made college debt untouchable. Borrowers typically must repay student loans over their lifetime, even those facing extreme financial hardship.

In March, Federal Reserve chairman Jerome Powell said he would be “at a loss to explain” why student loans can’t be cancelled like other debt. The Trump administration is considering whether to fight cancellation requests less aggressively.

Consumer bankruptcy lawyers are starting to notice that judges are being more flexible. One Las Vegas law firm recently filed the first cancellation request in its 14-year history after hearing a judge at a conference voice concern over student loans. Other lawyers said growing sympathy amounts to judges making lenders more willing to reach resolutions in court.

“I’m getting really good results with settlements these days,” said Chicago lawyer David Leibowitz. “I’m not the only one.”

Rules governing how student debt is handled in bankruptcy are made by Congress and by judges who issue influential rulings. Several bills in Congress that would erase student-loan debt in bankruptcy have stalled in recent years.

Last year in Philadelphia, U.S. Bankruptcy Court Judge Eric Frank cancelled a single mother’s $30,000 in student loans. Opposing lawyers from the U.S. Department of Education said the borrower needed to prove her hardship would persist 25 years. Judge Frank ruled that the relevant window was five years.

An appeals court over-turned his ruling, but his decision inspired a Tacoma, Wash., judge in December to cancel a portion of another borrower’s loans.

Such rulings are rare because few troubled borrowers attempt to cancel their student loans, because of the historically slim chances of victory.

Some bankruptcy judges criticize colleagues for re-interpreting well-settled law on student loans. “My view is, if the law is clear, follow it,” said retired California judge Peter Bowie.

The push to rethink the legal standard on student-loan debt is bipartisan. Judges interviewed by the Wall Street Journal were appointed during both Republican and Democratic administrations, though bankruptcy judges are appointed by appeals court judges, not the president.

Before 1976, laws allowed borrowers to do away with student-loan debt in bankruptcy. Congress, out of concern that the new graduates would take too much advantage of that option, made a new rule: Borrowers could cancel student loan debt after only five years of payments. Judges could grant exceptions if borrowers showed that repaying would cause “undue hardship.”

Congress didn’t define “undue hardship” so the task of doing so fell to federal judges. When Marie Brunner, a 1982 graduate of a master’s program in social work tried to cancel her loans in bankruptcy, a New York judge in 1985 said she had to show three things: she struggled financially, her struggles would continue and that she had made a good faith effort to repay. She lost.

That list still serves as a baseline for hardship in circuit courts that control the rules in most states.  Some appeals courts set even higher bench-marks, with one, for instance, saying borrowers must face a “certainty of hopelessness.”

In 1998 Congress said any borrower trying to cancel any federal student loans must prove “undue hardship,” like Ms. Brunner. Congress gave private student loans the same protection in 2005.

Some of the country’s bankruptcy judges are starting to argue that the prevailing legal standard is unintentionally harsh and wasn’t meant for adults still on the hook for student-loan debt years after college.

Judge Frank Bailey in Boston made that argument in an April ruling wiping out $50,000 in student loans for a 39-year-old man whose health ailments prevent him from working.

Some judges, including U.S. Bankruptcy Court Judge Michael Keplan in Trenton, N.J., said they are looking for ways to be more forgiving after seeing their own adult children borrow heavily for their education. Other judges grew concerned after talking to their law clerks. The typical law-school student takes out $119,000 in loans.

Two judges said they regret their rulings against borrowers more than a decade ago.

Kansas judge Dale Somers said he worked particularly hard to justify the reasoning in a December 2016 ruling that cancelled more than $230,000 in interest that built up on a couple’s student loans from the 1980s. They left bankruptcy owing $78,000.

Alabama judge William Sawyer declared that student loans had become “a life sentence” in a 2015 decision cancelling a $112,000 student loan debt for high school science teacher Alexandra Conniff, a single mother of two teen boys whose yearly income is $59,400.”

Credit given to Katherine Stech (Wall Street Journal)

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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.

This Week’s Author – Mark C. Bradstreet, CPA

-until next week

Happy Holidays & Happy New Year! December 26, 2018

Posted by bradstreetblogger in : General, Tax Deadlines, Tax Planning Tips, Tax Preparation, Tax Tip, Uncategorized , add a comment

Happy Holidays & Happy New Year!

And get ready for the tax filing season.

Hopefully, you followed some of the suggestions outlined in Publication 552 to organize your records. If you did, great! This will make filing your tax returns a lot easier this year. It also means that you and your tax advisor can spend more time on tax and financial planning issues for 2019 vs. looking back to 2018.

This week we will look at some of the more common forms that you should be watching for in the coming weeks and months:

W-2:    Employers should mail these by 1/31/19. If you have moved during the year, make sure former employers are aware of your new address. Some employers provide W-2’s to their employees via a website. Be sure to login and print out your W-2 after it is available.

W-2G:    Casinos, Lottery Commissions and other gambling entities should mail these by 1/31/19 if you have gambling winnings above a certain threshold. Note: Some casinos will issue you a W-2G at the time you win a jackpot. Make sure you have saved those throughout the year.

1096:    Compilation sheet that shows the totals of the information returns that you are physically mailing to the IRS.The check box for Form 1099-H was removed from line 6, while a check box for Form 1098-Q was added to line 6.The spacing for all check boxes on line 6 was expanded.The amounts reported in Box 13 of Form 1099-INT should now be included in box 5 of Form 1096 when filing Form 1099-INT to the IRS.

1098-C:    You might receive this form if you made contributions of motor vehicles, boats, or airplanes to a qualified charitable organization. A donee organization must file a separate Form 1098-C with the IRS for each contribution of a qualified vehicle that has a claimed value of more than $500. All filers of this form may truncate a donor’s identification number (social security number, individual taxpayer identification number, adoption taxpayer identification number, or employer identification number), on written acknowledgements. Truncation is not allowed, however, on any documents the filer files with the IRS.

1099-MISC:   This form reports the total paid during the year to a single person or entity for services provided. Certain Medicaid waiver payments may be excludable from the income as difficulty of care payments. A new check box was added to this form to identify a foreign financial institution filing this form to satisfy its Chapter 4 reporting requirement.

1099-INT:    This form is used to report interest income paid by banks and other financial institutions. Box 13 was added to report bond premium on tax-exempt bonds. All later boxes were renumbered. A new check box was added to this form to identify a foreign financial institution filing this form to satisfy its Chapter 4 reporting requirement.

1099-DIV:    This form is issued to those who have received dividends from stocks. A new check box was added to this form to identify a foreign financial institution filing this form to satisfy its Chapter 4 reporting requirement.

1099-B:     This form is issued by a broker or barter exchange that summarizes the proceeds of sales transactions. For a sale of a debt instrument that is a wash sale and has accrued market discount, a code “W” should be displayed in box 1f and the amount of the wash sale loss disallowed in box 1g.

1099-K:    This form is given to those merchants accepting payment card transactions. Completion of box 1b (Card Not Present transactions) is now mandatory.

K-1s:    If you are a partner, member or shareholder in a partnership or S corporation, your income and expenses will be reported to you on a K-1. The tax returns for these entities are not due until 3/15/19 (if they have a calendar-year accounting). Sometimes, you may not receive a K-1 until shortly after the entity’s tax return is filed in March.

If you are a beneficiary of an estate or trust, your share of the income and expenses for the year will also be reported on a K-1. These returns will be due 4/15/19 so you might not receive your K-1 before the due date of your Form 1040.

NOTE:  Many times corporations, partnerships, estates and trusts will put their tax returns on extension. If they do, the due date of the return is not until 9/16/19 or later. We often see client’s receiving K-1s in the third week of September.

If you receive, or expect to receive, a K-1 it is best if you place your personal return on extension. It is a lot easier to extend your return then it is to amend your return after receiving a K-1 later in the year.

1098:    This form is sent by banks or other lenders to provide the amount of mortgage interest paid on mortgage loans. The form might also show real estate taxes paid and other useful information related to the loan.

1098-T:    This form is provided by educational institutions and shows the amounts paid or billed for tuition, scholarships received, and other educational information. These amounts are needed to calculate educational credits that may be taken on your returns.

So start watching your mailbox and put all of these statements you receive in that new file you created!

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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 | New Expensing and Bonus Depreciation Rules for Small Businesses December 19, 2018

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

New Expensing and Bonus Depreciation Rules for Small Businesses

As we approach the end of 2018, many businesses are reviewing their capital asset needs for this year and next and considering the tax benefits of buying these assets this year or next.

Some of the new rules are shown below as a refresher.

Remember Section 179 may be elected for part or all of the qualifying asset cost. However, use of Section 179 may not be fully deducted if it creates a loss and can not exceed certain thresholds as described below.

Section 168 is now available for new or used qualifying assets. It may create a loss but it must be taken on all purchased assets in a particular “asset class.”

-Mark Bradstreet, CPA

Isaac M. O’Bannon, Managing Editor on Nov 15, 2018 (CPA Practice Advisor)

“Some of the changes in the tax reform law mean small businesses can immediately expense more of the cost of certain business property. Many are now able to write off most depreciable assets in the year they are placed into service.

The Tax Cuts and Jobs Act (TCJA), passed in December 2017, made tax law changes that will affect virtually every business and individual in 2018 and the years ahead. Among those for business owners are tax rate changes for pass-through entities, changes to the cash accounting method for some, limits on certain deductions and more.

Section 179 expensing changes

A taxpayer may elect to expense all or part of the cost of any Section 179 property and deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million. These changes apply to property placed in service in taxable years beginning after Dec. 31, 2017. For most businesses, this means the 2018 return they file next year.

Section 179 property includes business equipment and machinery, office equipment, livestock and, if elected, qualified real property. The TCJA also modifies the definition of qualified real property to allow the taxpayer to elect to include certain improvements made to nonresidential real property. See New rules and limitations for depreciation and expensing under the Tax Cuts and Jobs Act for more information.

New 100 percent, first-year ‘bonus’ depreciation

The 100 percent depreciation deduction generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances and furniture generally qualify. The law also allows expensing for certain film, television, and live theatrical productions, and used qualified property with certain restrictions.

The deduction applies to business property acquired after Sept. 27, 2017, and placed in service after Sept. 27, 2017, and before Jan. 1, 2023.  In general, the bonus depreciation percentage is reduced for property placed in service after 2022. See the proposed regulations for more details.

Taxpayers may elect out of the additional first-year depreciation for the taxable year the property is placed in service. If the election is made, it applies to all qualified property that is in the same class of property and placed in service by the taxpayer in the same taxable year. The instructions for Form 4562, Depreciation and Amortization, provide details.”

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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.

This Week’s Author – Mark C. Bradstreet, CPA

–until next week

Tax Tip of the Week | Pay Your Taxes Like a Billionaire: Carefully December 12, 2018

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

Pay Your Taxes Like a Billionaire:  Carefully


One of the more common comments I hear is that the “rich” don’t pay income taxes. That is simply not true. However, many of the “rich” own and operate a business, sometimes more than one. These businesses do offer some great planning opportunities not available to many non-entrepreneurs. Often, some of the major components of these tax saving strategies revolve around the use of accelerated depreciation methods for qualifying assets and some sophisticated retirement plans.
The following excerpts from Laura Sanders (WSJ, December 1-2, 2018) further explain some of the intricacies of extended planning for individuals and businesses under the new tax laws.

-Mark C. Bradstreet

“The richest Americans have long saved billions from multi-year tax planning. Now it makes sense for many others to do the same. Advisors to high earners have always done multiyear analyses of items like operating-loss carryforwards or stock options for their clients. But because of last year’s tax overhaul, filers earning less have an incentive to use this approach.

Individuals may decide to speed up or slow down their charitable donations, while business owners may want to spread out certain deductions instead of taking them all at once. The result could be a significantly lower tax bill over time.

One key driver of the change is the near doubling of the standard deduction, the amount taxpayers get if they don’t itemize write-offs like mortgage interest, state and local taxes, and charitable donations on a Schedule A. This write-off is now $12,000 for single filers and $24,000 for married couples.

This is where multiyear planning helps.

Say that John and Jane have paid off their mortgage, owe $15,000 in state and local taxes, and give $10,000 a year to charities.

For 2017, they deducted the $25,000 total on Schedule A because it was greater than their standard deduction of $12,700. But their 2018 state-tax write-off is capped at $10,000. Thus, their deductions total $20,000, less than their $24,000 standard deduction this year.

Now see what happens if they accelerate their $10,000 of 2019 donations into 2018. They can deduct $30,000 on Schedule A for 2018 and take the standard deduction for 2019, which is $24,400 after an inflation adjustment. By doing this, their write-offs over two years total $54,400 rather than $48,400.

“People should maximize charitable deductions, as it’s often the only Schedule A strategy left,” says David Lifson, a CPA with Crowe LLP in New York.

Multiyear planning is also newly important to owners of pass-through businesses like a proprietorship, partnerships and S corporations. They now get a 20% deduction, as long as their own taxable income doesn’t exceed $157,500 for single filers or $315,000 for married couples. Above that, the deduction can shrink or disappear.

Owners with income above the limits can use various strategies to get below it. Among them: investing in depreciable equipment; making charitable donations; and saving more in retirement plans with deductible contributions.

Say a married business owner has a taxable income of $330,000 and buys $100,000 of equipment. The law allows him to deduct 100% of the cost right away, which gets him far below the $315,000 income threshold – for one year.

Instead, says Mr. Porter [a CPA in Huntington, W. VA], the owner should consider spreading out these deductions, as is often allowed.  If he takes the $100,000 write-off over five years, perhaps he can lower his income so it’s below the threshold for that period, qualifying him for a full 20% write-off each year.

With year-end nearing, here are other tax moves.

•    Take capital gains and losses as needed.  Don’t let the tax tail wag the dog, but remember that capital losses can offset taxable capital gains from investments and reduce a filer’s bill. Up to $3,000 of excess capital losses can also be deducted against “ordinary” income like wages.

Investors who sell losing securities can’t repurchase them for 30 days before or after without running afoul of Internal Revenue Service rules. Winners can be rebought right away.

•    Beware of the 3.8% surtax. The 3.8% tax on investment income applies to most married couples with more than $250,000 of adjusted gross income and most singles with more than $200,000.

It’s levied on net investment income, such as interest, dividends, capital gains and royalties, above the thresholds.  Thus, if a single filer has $150,000 of income and a $75,000 capital gain, $25,000 would be subject to the 3.8% tax.

Some people can avoid this tax by planning, such as by selling part of an investment before year-end and the rest early in January.

•    Take required IRA payouts.  These are typically from traditional individual retirement accounts held by taxpayers 70½ and older.  The required payout is a percentage of total assets on the prior Dec. 31. Except for those taking their first such withdrawal, the payout must be taken by year-end.

IRA owners taking their first required payout have a later deadline:  April 1 of the year after they turn 70½.  But waiting means the IRA owner will owe tax on two IRA payouts in the second year, pushing some into a higher bracket, so it may make sense to take it before year-end.”

-Laura Saunders, WSJ

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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.

This Week’s Author – Mark C. Bradstreet, CPA

–until next week