jump to navigation

Tax Law: An Art or a Science? May 29, 2019

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

Is preparing tax returns an art or a science? My answer may depend upon the day you ask me. But, more often than not, I would say that tax preparation is a blend of an art AND a science.

Too often when people are presented with a tax problem of sorts – what do they do? Well, of course, they pull out their smartphone and GOOGLE their question. In all honesty I am guilty of this quick fix as well. Naturally, we are all looking for the answer that we wish to hear. That being anything that will save us taxes. Most GOOGLE responses, especially the ones near the top of the search page are click bait. They have the answers you want to see. You are doing yourself a disservice if you stop with that “fast and loose” answer. You have to look for the “odd” stuff, the twists and turns that accompany the exceptions to every tax rule. Some of these may help you while others will cost you money. Even once you have found the exceptions then one must continue to look for how your question fits in with or conflicts with other sections of the Internal Revenue Code. And, what about that tax law change or court case that was handed down yesterday. What about that new tax law on the horizon? Did you notice that the website where you fell in love with the answer is six (6) years old?

The “art” part comes from trying to hit a moving target. A target that is not always visible but at the end of the day you have to take the shot. Or, at least spin it in a fashion so that you have not crossed the often-fuzzy line and stayed in the gray.

                                        –    Mark Bradstreet

An Internal Revenue Service official once introduced me to the rule of PUNG. When writing about taxes, he said, make frequent use of the words “probably, usually, normally and generally.”

That’s generally good advice—not only for tax columnists struggling to explain tricky tax laws but also for tens of millions of taxpayers racing to file their returns on time. “The law is chock-full of exceptions and counterintuitive twists that are easy to overlook and can often have an important impact on your tax bill”, says Claudia Hill, owner of TaxMam Inc., a tax services firm in Cupertino, Calif.

With the tax-filing deadline fast approaching for most of us, here are a few reminders from tax pros on how the fine print can sometimes be your friend.

Filing deadline: For most taxpayers, the filing deadline is April 15. But it’s April 17 for taxpayers who live in Maine or Massachusetts because of the Patriots’ Day holiday there on April 15 and the Emancipation Day holiday in the District of Columbia on April 16. It can be even later for other taxpayers, such as those in places designated as federal disaster areas.

If you need more time to file, as millions of people do each year, don’t panic: The IRS gives automatic six-month extensions until Oct. 15. But its website notes that an “extension of time to file your return doesn’t grant you any extension of time to pay your taxes.” The IRS estimates it will receive more than 14.6 million extension requests; a spokesman says.

Casualty losses: Fires, floods, mudslides, tornadoes, hurricanes and many other natural disasters made 2018 a year many of us are eager to forget, and this year already is shaping up as another grim reminder of Mother Nature’s awesome power.

At first glance, the wide-ranging tax law enacted in late 2017 might seem like yet another disaster for the many people who suffered major casualty losses. That law generally eliminated personal casualty and theft-loss deductions for most taxpayers, starting last year. But there is an important exception, says Jackie Perlman, principal tax research analyst at The Tax Institute at H&R Block Inc. in Kansas City, Mo. Victims still are eligible to deduct net personal casualty losses “to the extent they’re attributable to a federally declared disaster,” the IRS says.

Warning: There are important loss limitations and other tricky calculations to consider. For details, see IRS Publication 547.

Here is a holdover from the old law that may surprise some people because it sounds counterintuitive: Victims in federal disaster areas can choose to claim their losses for the year in which the disaster actually struck or for the prior year. For example, taxpayers with net personal casualty losses this year could claim their losses on their return for 2018—or they could wait until next year and claim it on their return for 2019, says Ms. Jackie Perlman of H&R Block. Taxpayers who suffered losses in 2018 could claim those losses on their return for that year—or on their return for 2017 (typically by filing an amended return).

14-day rule: As a general rule, the net rental income you get from renting out your home is subject to tax. But “there’s a special rule if you use a dwelling unit as a residence and rent it for fewer than 15 days,” the IRS says on its website. “In this case, don’t report any of the rental income and don’t deduct any expenses as rental expenses.”

Those 14 days don’t have to be consecutive, says Ms. Claudia Hill, who is also an enrolled agent (enrolled agents are tax specialists authorized to represent taxpayers at all levels of the IRS). But if you rent your home for 15 days or more, include all of that rental income in your income, says Ms. Jackie Perlman.

Refund claims: Don’t assume that you have forever to file your federal income-tax return as long as you are entitled to a refund. About 1.2 million taxpayers could lose almost $1.4 billion in unclaimed refunds because they still haven’t filed a 2015 Form 1040 return, the IRS warned in a recent press release.

“In cases where a federal income tax return was not filed, the law provides most taxpayers with a three-year window of opportunity to claim a tax refund,” the IRS says. If they miss that deadline, “the money becomes the property of the U.S. Treasury. For 2015 tax returns, the window closes April 15, 2019, for most taxpayers.”

Here are other reasons to pay attention: The IRS reminded taxpayers seeking a 2015 tax refund “that their checks may be held if they have not filed tax returns for 2016 and 2017. In addition, the refund will be applied to any amounts still owed to the IRS or a state tax agency and may be used to offset unpaid child support or past due federal debts, such as student loans.”

Credit for excess Social Security tax: Most people probably assume it’s a waste of time to check and see how much their employers withheld from their paychecks for Social Security. But consider doing it anyway, especially if you’re a high-income taxpayer who worked for two or more employers last year. The maximum amount that should have been withheld for 2018 was $7,960.80 (6.2% of $128,400, which was the maximum amount of wages subject to the tax.) If more than that was withheld, claim a credit for the excess amount. However, if any single employer withheld too much, ask the employer to adjust the tax for you, the IRS says. “If the employer doesn’t adjust the overcollection you can file a claim for refund using Form 843.”

Interesting exception: Interest income you receive on U.S. Treasury bills, notes and bonds is taxable at the federal level. But don’t forget that such interest is tax-free at the state and local level. That can be especially important for taxpayers in New York City, California or other high-tax areas.

Additional standard deduction: Thanks to the 2017 law, tax professionals predict many more people will claim the standard deduction for 2018, rather than itemizing. That law included a sharp increase in the basic standard deduction and generally limited state and local tax deductions to $10,000 per household. The basic standard deduction for 2018 is $24,000 for married couples filing jointly, or $12,000 for most singles and those who are married but filing separately.

But there is an extra amount for older taxpayers, those who qualify as blind, or both. For example, if you’re married filing jointly and you and your spouse each are 65 or older, the total standard deduction for 2018 would be $26,600. See IRS Publication 17 for more details.

IRA deadline: It might seem logical to assume there is nothing you can do now to affect your return for 2018. But for some people, it isn’t too late: The IRS says contributions to a traditional IRA can be made for a year “at any time during the year or by the due date for filing your return for that year, not including extensions. For most people, this means that contributions for 2018 must be made by April 15, 2019 (April 17, 2019, if you live in Maine or Massachusetts).”

Educator Expenses: Teachers and other educators who pay for educational supplies and other expenses out of their own pockets should be aware that those costs may be deductible up to $250 a year. This special deduction applies to teachers from kindergarten through grade 12, instructors, counselors, principals or aides in school for at least 900 hours during a school year. Qualified expenses include “ordinary and necessary expenses paid in connection with books, supplies, equipment (including computer equipment, software, and services), and other materials used in the classroom,” the IRS says. But you can’t deduct expenses for home schooling or for “nonathletic supplies for courses in health or physical education.”

If you and your spouse file jointly and both are eligible, “the maximum deduction is $500,” the IRS says. “However, neither spouse can deduct more than $250 of his or her qualified expenses.” This deduction goes on Schedule 1 of Form 1040, line 23.

Credit given to: Tom Herman. This article was written for the WSJ on Monday, March 25, 2019. Mr. Herman is a writer in New York City. He was formerly The Wall Street Journal’s Tax Report columnist. Send comments and tax questions to taxquestions@wsj.com.

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.

This Week’s Author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | All You Need to Know About Student Loan Forgiveness March 27, 2019

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

The sheer magnitude of our outstanding student loan debt is beyond my feeble comprehension. According to the Federal Reserve, student-loan debt hit $1.53 trillion at the end of the second quarter of 2018. I may understand “millions” and just perhaps “billions,” but the concept of “trillions” totally escapes me. Almost two-thirds of that total debt or about $900 billion is carried by women.

An article written in the WSJ on December 17, 2018 by Ms. Berman, a reporter at MarketWatch follows. Her article discusses some limited options on having some of the student-loans forgiven, but, very often someone has to jump through some really high hoops to qualify. So keep your fingers crossed, but I wouldn’t hold your breath.

                                                                                                    – Mark C. Bradstreet

“Student-loan forgiveness might seem out of reach for many of the 44 million people who have educational debt. But some of these borrowers may qualify for relief—if they know where to look.

Student-loan forgiveness has gotten somewhat of a bad rap in recent months, largely because of controversy surrounding the federal Public Service Loan Forgiveness program, which allows public servants with a certain type of federal student loans to have their debt discharged after 120 monthly payments.

The first cohorts of borrowers became eligible for forgiveness under PSLF in the fall of 2017 and in the months since, advocates have grown concerned that confusion about the program’s requirements, combined with sloppy implementation on the part of student-loan companies and the government, has made it difficult for eligible borrowers to qualify. Of the roughly 28,000 people who filed an application for debt forgiveness under the program as of June 2018, just 96 had their loans forgiven, government data show.

PSLF may be the best known loan-forgiveness program, but it isn’t the only one. Not only are there other federal programs, cities and states across the country offer some debt forgiveness for people who work in certain jobs or even live in certain areas.

Here is a closer look at some programs and their requirements:

Federal programs

PSLF: To be eligible, borrowers must work full-time in a public-service job for the right type of employer—typically a federal, state or local government or a nonprofit with a 501(c)3 designation. They must have the right type of loan—a federal Direct Loan—and be in an income-driven repayment plan to benefit. Borrowers also need to have made 120 on-time payments toward their debt to have the remainder forgiven under PSLF.

It’s hard to say exactly why so many borrowers who applied to have their loans forgiven were rejected. It could be that many simply hadn’t been working in public service or paying down their loans for the full 10 years. But some data indicate that confusion over the program’s requirements played a role.

Of borrowers who have had at least one employment certification form (the document borrowers can use to ensure they’re on track toward forgiveness) approved, nearly 12% are repaying their loans under a nonqualifying repayment plan, according to the Education Department. Congress authorized a temporary expansion of PSLF earlier this year for borrowers who met all of the program’s other requirements but were using certain nonqualifying repayment plans.

Advocates also worry that borrowers who have Federal Family Education Loans, which don’t qualify for PSLF, are working in eligible jobs and repaying their debt, assuming they’ll qualify for forgiveness only to later face a rude awakening. Borrowers can consolidate FFEL debt into Direct Loans, but they may not know to do that unless they receive information about it from their student-loan servicer. (Borrowers who think they might qualify for PSLF should reach out to their servicer and ask whether they have Direct Loans, and if not, how they can consolidate their student debt into Direct Loans.)

Liz Hill, an Education Department spokeswoman, says the agency’s office of Federal Student Aid is approving every eligible application for PSLF under the “strict rules” established by Congress. It is also conducting regular outreach to borrowers about the program via social media, webinars and in person events.

“FSA is committed to enhancing the process, outreach, and communications related to the program,” she wrote in an email.

Are You Eligible?
Borrowers who want to know if they are on track to qualify for the federal Public Service Loan Forgiveness program can submit an employment certification form. A separate application is needed to claim forgiveness.

Teacher loan forgiveness: Teachers who work for five consecutive years in qualifying schools—typically those serving low-income students-—can receive up to $17,500 in forgiveness on certain federal loans; depending on what subject they teach. They need to have been a new borrower as of Oct. 1, 1998, meaning that they had no prior loans still outstanding as of this date. Also, they must have completed at least one of their qualifying years of teaching after the 1997-1998 academic year.

Teachers can’t use this program and PSLF at the same time, so they need to pick that one that best suits their financial needs. The American Federation of Teachers, a national teachers union, tends to advise borrowers to focus on PSLF, which offers superior benefits, unless the borrower doesn’t plan to stay in public service for the full 10 years.

Perkins Loan cancellation: Nurses, firefighters, public defenders and others may be eligible for cancellation of their Perkins Loans, federal need-based loans for both undergraduate and graduate students. Typically, a percentage of the loan is forgiven for each year of service, culminating in 100% of the loan being discharged after up to seven years.

Congress ended schools’ authority to make new Perkins Loans last year, so there won’t be any new borrowers receiving them—at least for now.

Income-driven repayment forgiveness: Borrowers using income-driven plans for federal loans can have the balance of the debt discharged after 20 or 25 years of payments, even if they aren’t working in public service. But under current law, debt relief is taxed as income, so borrowers may face a heftier-than-normal tax bill after their loans are discharged.

State, local programs

States and regions across the country offer a variety of student-loan forgiveness programs, most of which fall into two categories: those tied to a specific occupation or those tied to living in a specific region, or both. Many of these programs cover private student loans, which federal debt-forgiveness programs don’t.

“Almost every single state has at least one program,” says Betsy Mayotte, president of the Institute of Student Loan Advisors, which recently compiled a list of 115 debt-forgiveness programs.

While the list is a good place to start, Ms. Mayotte cautions that the eligibility criteria and funding available for many of these programs changes constantly, so borrowers need to check with the entities offering forgiveness directly before making a financial plan based on them.

In some cases, borrowers may be able to combine a state or local program with Public Service Loan Forgiveness, says Heather Jarvis, an attorney and student-loan expert. For example, borrowers can use some loan-repayment assistance programs sponsored by states, nonprofits or their employers to help defray the cost of their loan payments during the 10 years they’re working to become eligible for PSLF.

Occupation-focused programs typically center on health care, education or legal-services jobs, Ms. Mayotte says.

Michigan’s Department of Health and Human Services will pay off a significant chunk of health professionals’ loans—both federal and private—if they agree to work in primary care in an underserved area. The initiative, which doctors, dentists, nurse practitioners and other health professionals can use to pay off up to $200,000 of debt over eight years, was designed “specifically to recruit and retain primary-care providers in underserved areas in Michigan,” says Elizabeth Nagel of the policy, planning and legislative-services administration at the Michigan Department of Health & Human Services.

Location-based programs, while not as widespread, simply require the borrower to live in a certain region, Ms. Mayotte says.

Kansas launched its Rural Opportunity Zones program in 2011 to encourage educated workers to move to certain rural regions experiencing population decline, says Rachéll Rowand, the program manager.

Borrowers with an associate’s, bachelor’s or graduate degree and a student-loan balance in their own name can become eligible for some debt relief by establishing residency in a ROZ county on or after the date the county opted into the program. They also need a sponsor, which can be an employer or the county itself. Borrowers can receive up to $15,000 in assistance on federal and private student loans over five years. And they can use the program along with PSLF if they qualify.

Of course, when considering any loan-forgiveness program tied to a job or place, borrowers need to ask themselves how committed they are to staying put for a long period.

While a loan-forgiveness program essentially helps to make a low-paying career possible with high student-debt levels, it “really isn’t an incentive to go into a particular occupation,” says Mark Kantrowitz, the publisher of Savingforcollege.com and a financial-aid expert.

“In most cases,” he says, “you might actually be better off taking a job in a different field that pays better.”

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 |Offshore Tax Cheats – The IRS is Still Coming for You March 6, 2019

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

Having an offshore account is not illegal, provided the accounts are in compliance with U.S. tax laws which include appropriate disclosure. And, yes, you can get into serious trouble for failing to attach the appropriate forms to your income tax return. So, please be certain to advise your tax preparer of any foreign assets you may have. But, where things get really dicey, is the situation of using these “secret” accounts to hide your money and not paying any income tax (offshore tax evasions is a criminal act). More details from Laura Saunders follow.

  • Mark Bradstreet

“Hiding money from the U.S. government is a lot harder than it used to be.  

On Sept. 28, the Internal Revenue Service will end (now ended) its program allowing American tax cheats with secret offshore accounts to confess them and avoid prison. In a statement, the IRS said it’s closing the program because of declining demand.

But the agency vowed to keep pursuing the people hiding money offshore and said it will offer them another route to compliance.

What a difference a decade makes.

Before 2008, an American citizen could often walk into a Swiss bank, deposit millions of dollars, and walk out confident that the funds were safe and hidden from Uncle Sam, says Mark Matthews, a lawyer with Caplin & Drysdale who formerly helped the IRS’ criminal division.

Now he says, “Americans hiding money abroad have to go to small islands with sketchy advisers and less reliable financial systems.”

The reason:  a historic crackdown on the longstanding problem of U.S. taxpayers hiding money offshore, U.S. officials ramped it up after a whistleblower revealed that some Swiss banks saw U.S. tax evasions as a profit center and were sending bankers onto U.S. soil to hunt for clients.

The defining moment came in 2008, when Justice Department prosecutors took Swiss banking giant UBS AG to court and managed to pierce the veil of Swiss bank secrecy. In 2009, UBS agreed to pay $780 million and turn over information on hundreds of U.S. customers to avoid criminal prosecution.

The Justice Department repeated the UBS strategy, with variations, for scores of other banks and financial firms in Switzerland, Israel, Liechtenstein and the Caribbean. So far, institutions have paid about $6 billion and turned over once-sacrosanct customer information. More major settlements are still to come.

Prosecutors also successfully pursued more than 150 individuals hiding money abroad. Some defendants earned jail time, and many paid dearly – a total of more than $500 million so far. Dan Horsky, a retired business professor and a startup investor, appears to have handed over the largest amount: $125 million for hiding more than $220 million offshore.  

In many cases, a taxpayer can owe a penalty of half a foreign account’s value, if it’s greater than $10,000 and it’s not reported to the Treasury Department. Ty Warner, the billionaire creator of Beanie Babies plush toys, paid $53.6 million for hiding an account with more than $100 million.

The IRS capitalized on tax cheats’ fears of detection with its Offshore Voluntary Disclosure Program, the limited amnesty that’s ending. It hit confessors with large penalties in exchange for no prosecution. Since 2009, more than 56,000 U.S. taxpayers in the program have paid $11.1 billion to resolve their issues.

To be sure, the U.S. crackdown hasn’t reached everywhere – notably Asia.

Edward Robbins, a criminal tax lawyer in Los Angeles formerly with the IRS and Justice Department, attributes the enforcement gap to the widespread use of human beings, rather than structures like trusts, to shield account ownership in Asia.

“In the Far East, individuals often use other individuals who use other individuals to hold assets. Finding the true owner is a tough nut to crack, unlike in the West,” he says.

The crackdown also had drawbacks, making financial life difficult for many of the roughly 4 million U.S. citizens living abroad. Unlike most countries, the U.S. taxes citizens on income earned both at home and abroad. Often expatriates were stunned to find they could be considered tax cheats under the expansive U.S. Law and that compliance would be onerous.

In reaction, more than 25,000 expats have given up U.S. citizenship since 2008, with some paying a stiff exit tax. Others are working to get Congress to change the taxation of nonresidents.

For expats and others, the IRS now offers a compliance program with lesser penalties, or none, for offshore-account holders who didn’t willfully cheat. About 65,000 taxpayers have entered the program and the IRS says it will remain open for now.

Current and would-be tax cheats should take seriously the IRS’s vow to keep pursuing secret offshore accounts, says Bryan Skarlatos, a criminal tax lawyer with Kostelanetz & Fink who has handled more than 1,500 offshore disclosures to the IRS.

Although the IRS’s staffing is way down, he says, the agency and the Justice Department have far better tools for detecting and combating evasion than 10 years ago.

Among these agencies’ tools are the Fatca law, which requires foreign firms to report information on American account holders.This law is providing the IRS with streams of useful information it’s using in prosecutions.This week brought the first guilty plea for a violation of Fatca rules by a former executive of a bank in Hungary and the Caribbean.

The IRS is also mining data from foreign bank settlements and whistleblower information. The payment of $104 million to UBS whistleblower Bradley Birkenfield, apparently the largest ever, has inspired other informers.

To detect clusters of cheats, U.S. officials now can use a “John Doe summons” to force firms to release information on a class of customers suspected of evading taxes – even if their identities aren’t known, and even if the information isn’t in the U.S.

This strategy has been so successful that the IRS has broadened its use to identify possible tax cheats using cryptocurrencies.

“More than ever, there’s no place to hide,” say Mr. Skarlatos.”

Credit given to Tax Report, Laura Saunders, WSJ, September 15-16, 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 | How The New 20% QBI Deduction (199A) May Apply to Rentals (particularly triple net leases) February 27, 2019

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

How The New 20% QBI Deduction (199A) May Apply to Rentals (particularly triple net leases)

As a refresher, the QBI deduction is available for the first time on your 2018 Form 1040. So, this is all new stuff for you and us (and the IRS). The new QBI deduction, created by the 2017 Tax Cuts and Jobs Act (TCJA) allows many owners of sole proprietorships, partnerships, S corporations, trusts, or estates to deduct up to 20 percent of their qualified business income. Yes, if you qualify – that may be a huge deduction for you. So, when it comes to the interpretation of 199A, there is a lot at stake for a lot of businesses.

Landlords have anxiously awaited further guidance in regards to Section 199A. There has been much speculation if, when and how the Section 199A would apply for them.  Finally, on Friday, January 18, 2019, the Treasury Department and the Internal Revenue Service issued final regulations on the implementation of the new qualified business income (QBI) deduction for rentals. Now we have to interpret their interpretation. And, only time will tell, whether this final interpretation is their last interpretation (probably not).

What follows is specifically about landlords and the applicability of 199A. For starters, let’s define “triple net lease.” This term often comes up in business conversations. Interestingly, not everyone has the same definition in mind. So, excerpts from the first article below define some different types of leases before moving into the second and last article which tends to revolve around “triple net leases.” Please keep in mind that his interpretation of the final 199A interpretation as well as some of his opinions may differ from ours. Many parts of the new tax law are still fuzzy, moving targets and this one is no exception.

By Mark Bradstreet

By Rob Blundred  – Commercial Sales Associate, Henkle Schueler and Associates
Aug 6, 2018

Net lease
The benefit of a net lease is that the landlord can charge a lower base rent price. However, along with the base rent the tenant is responsible for an “additional rent fee” which covers the operations and maintenance of the property. These costs can cover real estate taxes, property insurance and common area maintenance (CAM) items. The CAM fees cover the landlord costs for janitorial services, property management fees, sewer, water, trash, landscaping, parking lot, fire sprinklers, and any shared area or service.

There are several types of net leases:

•    Single net lease (N lease). In this lease, the tenant pays base rent plus their pro rata share of the building’s property tax (meaning a portion of the total bill based on the proportion of total building space leased by the tenant). The landlord covers all other building expenses. The tenant also pays utilities and janitorial services.

•    Double net lease (NN lease). The tenant is responsible for base rent plus their pro-rata share of property taxes and property insurance. The landlord covers expenses for structural repairs and common area maintenance. The tenant once again is responsible for their own janitorial and utility expenses.

•    Triple net lease (NNN lease). This is the most popular type of net lease for commercial freestanding buildings and retail space. The tenant pays all or part of the three “nets” – property taxes, insurance, and CAMS – on top of a base monthly rent.

Absolute triple net lease

The absolute triple net lease is an extreme form of an NNN lease where the tenant absorbs all of the real estate risk and responsibility. The tenant is ultimately responsible for all building-related expenses and repairs, including roof and structure.

Modified gross lease

The appeal of a modified gross lease is the tenant has one set amount to pay each month. In a modified gross lease, the base rent and “nets” (property taxes, insurance and CAMS) are all included in one lump sum payment; excluding utilities and janitorial services, which are typically covered by the tenant.
The benefit of a modified gross lease is their flexibility. They are generally an easier agreement to make between the landlord and tenant. The risk is if insurance, taxes or CAM increase or decrease the cost or savings is passed on to the landlord.

Why Is the IRS Punishing Triple Net Landlords?

Alan Gassman Contributor to Forbes Jan 26, 2019
Retirement  (writes about tax, estate and legal strategies and opportunities.)

“There are horrible people who, instead of solving a problem, tangle it up and make it harder to solve for anyone who wants to deal with it.

Whoever does not know how to hit the nail on the head should be asked not to hit it at all.”

– Friedrich Nietzche

While the IRS as a whole is by no means “horrible,” the new Final Regulations regarding Section 199A of the Internal Revenue Code must seem that way to landlords who lease property under triple net leases. The vast majority of these will not be considered to be “active trades or businesses” for purposes of qualifying for the 20% deduction that will be available to most active landlords.

Code Section 199A was introduced to the Internal Revenue Code as part of the 2017 Tax Cuts and Jobs Act with the intent of giving taxpayers some degree of parity with the 21% income tax bracket bestowed upon large and small companies that are taxed as separate entities (known to tax professionals as “C corporations.” C corporations are different than “S corporations,” as S corporations report their income under the “K-1” system that causes the shareholders to pay the income tax on their personal returns).

Since the term “trade or business” was not defined under Section 199A, the real estate community has been waiting for the Final Regulations which were released on Friday, January 18, and basically follow what the Proposed Regulations (released last August) said, which is that passive investors are not considered to be an active trade or business, even though they take significant economic risks and may work hard to verify that the tenants pay the taxes, insurances and maintenance of the leased property, comply with applicable law and otherwise do what tenants are supposed to do.

The practical result will be that landlords will need to become active and possibly renegotiate lease terms to have at least a chance of being eligible to have the deductions that other landlords will have, or to perhaps qualify under the new safe harbor rules that allow the deduction to non-triple net leases if they satisfy the 250 hour per year requirement, which requires tabulation of the work hours of landlords and agents of landlords, and certain time log and verification procedures.’

This seems very unfair since REIT (Real Estate Investment Trusts) income will often include triple net lease profits that will qualify for the Section 199A deduction, and C corporations only have to pay the 21% rate on net income from triple net leases.

Tax professionals, and masochists may enjoy or derive a better understanding by reading on.

The new Final Regulations refer to several Supreme Court cases to aide in defining what types of enterprises will qualify as a trade or business, and these cases do not bode well for landlords of triple net leases. For example, the Final Regulations cite to the Supreme Court’s 1987 landmark “trade or business” case, Commissioner v. Groetzinger, which held that to be engaged in a trade or business the following two requirements must be met:

1. The taxpayer’s involvement must be continuous and regular; and

2. The primary purpose of the activity must be for income or profit.

The very definition of a triple net lease seemingly disqualifies the majority of triple net landlords from qualifying under this definition under the assumption that they do not have continuous and regular involvement.

With triple net leases, the tenant is usually responsible for the three “nets”: real estate taxes, building insurance, and maintenance. By having the tenant be responsible for most of the on-site responsibilities, the landlord is able to spend more time and effort buying and selling other properties and therefore investing more into the economy.

In turn, triple net lease agreements usually benefit the tenant because the pricing of the agreement will reflect the fact that the tenant will be responsible for a lot of the on-site responsibilities. Now tenants have the upper hand when landlords ask to be allowed to provide at least 250 hours of services per year (cumulatively, as to all leases that the landlord will aggregate under the complicated aggregation rules, which are discussed in our blog post entitled Real Estate: Investing with Section 199A: Don’t Let Your Deductions Fly Out the Window).

The new Final Regulations do, however, contain one saving grace for taxpayers with triple net leases by quoting the 1941 Supreme Court case of Higgins v. Commissioner.

In Higgins the Supreme Court stated that the determination of “whether the activities of a taxpayer are ‘carrying on a business’ requires an examination of the facts in each case.” Since it is a factual determination, a taxpayer with the right facts can successfully argue that his or her triple net or almost triple net rental enterprise should constitute a qualified trade or business.

However, doing so will be a tough and expensive hurdle for many landlords to jump over.

Perhaps Congress will act in a compromise to assist the continued growth in the economy in recognizing that taxpayers with triple net leases put themselves at significant financial risk, in that tenants like Toys R Us and Sears may go bankrupt and leave a landlord high and dry after many months of eviction and then bankruptcy litigation. Many landlords are not aware that the bankruptcy law allows tenants to have the court terminate long term leases and limit damages to one year of rent.

Non-triple net lease landlords who spend considerable time in their leasing activities can take considerable comfort from Notice 2019-7, which was published alongside the new Final Regulations. The Notice provides the above-mentioned safe harbor for non-triple net leases to be “treated as a trade or business solely for the purposes of Section 199A.”

Under the new safe harbor, non-triple net rental real estate may be treated as a trade or business, if the following three requirements are met:

1. separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;

2. 250 or more hours of rental services are performed per year with respect to the rental enterprise; and

3. the taxpayer maintains contemporaneous records, including time reports or similar documents, regarding the following: a) hours of all services performed, b) description of all services performed, c) dates on which such services are performed, and d) who performed the service.

Interestingly, while triple net lease arrangements outside of REITs will likely not qualify under Section 199A, banks that are taxed as S corporations, or partnerships, are eligible for the deduction, although in many respects a loan is like a triple net lease where the landlord has put money out for a long term series of payments, where in many cases the vast majority of the value is in the years of payments to be received, just like a long term promissory note.

It is even more disturbing that other types of businesses involving much less risk on the part of the owner qualify for the deduction. These include brothels, franchisors and vending machine owners. How is it possible that a brothel owner sitting back and receiving rent from independent contractor “professional entertainers” may qualify for the benefits of Section 199A, but taxpayers with triple net leases do not?

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 | Gifting – The Good, The Bad and The Ugly February 20, 2019

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

Gifting – The Good, The Bad and The Ugly

I am receiving a gift…how much gift tax will I owe? This is one of the more common questions that we receive.  It is easy to make the tax concept of gifting more difficult than it is. The tendency is for the recipient of the gift to assume they must pay a “gift tax.” After all, they were the ones that received the gift. That would seem logical but it is not true.  If anyone pays a gift tax – it is the giver not the receiver. That, seems counterintuitive as well, being that the person who made the gift now may have to bear the tax burden on something they no longer have. However, because of an assortment of planning opportunities, few gifts result in a tax gift. The IRS doesn’t necessarily want to tax gifts per se. They just want to be sure that taxpayers aren’t using gifting mechanisms to reduce their taxable estate and beat the government out of future estate taxes.

Some nice explanations and planning strategies follow as authored by Dawn Doebler on December 5, 2018.

By Mark Bradstreet

Annual per person limits apply

The simplest rule to keep in mind is the “federal annual gift tax exclusion.” This limit is $15,000 per person in 2018 and can change each year. So long as you keep the value of your gift below $15,000 per person, you are free to gift to an unlimited number of people and will not have to report it or worry about paying any gift tax. For married couples, each person can use their own exclusion amount, meaning parents can gift up to $30,000 per child without triggering the gift tax. Gifts between legally married spouses are exempt — you can give an unlimited amount to your spouse!

You may need to file a gift tax return if …

… you make a gift in excess of the annual limit. Then you’re required to file Form 709, which is the gift-and-generation-skipping-transfer tax return. This doesn’t necessarily mean you’ll owe any tax. In fact, it’s likely you won’t. This return tracks the extra gift amount and will be deducted from your “federal lifetime exemption,” which applies when your final estate is settled after your death. As an example, if you are married and make a one-time gift of $50,000 for a down payment on a home for your unmarried child, you’d be required to file a gift tax return and report the $20,000 excess gift ($50,000 – $30,000: the combined annual gift limit for a married couple).

Estate tax laws are intertwined with gift tax laws

The federal estate tax exclusion amount is the mechanism that connects gift tax laws with estate tax laws. The federal government uses this rule to limit the amount you can give away over your lifetime.

This rule prevents wealthy individuals from giving away all of their money before their death to circumvent estate tax. (The top estate tax rate is 40 percent.) With the passing of the new tax law, the exclusion amount was increased to $11.18 million per person (which translates to $22.36 million for a married couple). So long as you give away less than $11.18 million over your lifetime, you likely won’t owe any federal gift tax. While this is a high number now, it’s not permanent. In 2025, this limit will sunset back to $5.6 million per person. If your wealth currently exceeds $11.18 million, it may make sense to take advantage of these higher limits between now and the end of 2025. It’s also important to document gifts that exceed the annual per-person limits to correctly plan in the future, as the laws may change.

Smart timing can help avoid gift taxes

One of the simplest ways to avoid having to file a gift tax return is to spread gifts over multiple calendar years. In the prior example, rather than gifting your child’s home down payment of $50,000 in one year, you could gift the maximum of $30,000 at the end of this year, and then gift the remaining $20,000 in 2019. With just a little bit of advance planning, you can split larger gifts into multiple tax years, and avoid using any of your lifetime exemption or having to file a gift tax return.

There’s more than one way to gift

Remember that these gift tax rules apply no matter what kind of asset you’re giving. One way to manage the overall tax effectiveness of your gifting is to give stocks rather than cash. For example, gifting appreciated stock is helpful if the gift recipient is in a lower tax bracket than you. You could avoid having to pay capital gains on the gifted stock and may be able to completely eliminate gains tax if the recipient’s income puts them in the zero-percent capital gains tax bracket (i.e. if a single person has income below $38,600). Keep in mind that kiddie tax rules apply if you are gifting to a child. For these reasons, it’s a good idea to consult with a CPA if you’re thinking about gifting stocks, real estate or other non-cash financial assets. You may also want to consider non-cash gifts as donations to donor-advised funds.

Take advantage of exceptions

Another way to avoid gift tax payments or reporting is to make use of the special exemptions provided in the laws. In the case of gifting for college funding, special rules apply to 529 plan contributions. You may exceed the annual gift limit by applying the exception that allows you to gift up to $75,000 to a 529 plan in one year. ($15,000 x 5 years = $75,000 per person per child). Another exception allows you to gift an unlimited amount for either medical expenses or education tuition so long as you make payments directly to the institution providing the services.

As the size of your gifts and your overall wealth increases, it’s wise to keep an eye on both the federal lifetime exemption amount and the annual gifting per-person limits. Doing so will keep you aware of any reporting requirements while also preserving the integrity of your lifetime exemption and maximizing the amount of money you can gift to others throughout your lifetime.

Credit given to: Dawn Doebler, MBA, CPA, CFP®, CDFA®, Senior Wealth Advisor

Dawn’s experience spans more than 25 years providing wealth management, financial planning and corporate finance solutions for clients. As an MBA, CPA, Certified Financial Planner (CFP®), and a Certified Divorce Financial Analyst (CDFA®), she is uniquely qualified to understand the challenges and financial needs of clients from executives to entrepreneurs, as well as single breadwinner parents. Dawn is a weekly contributor to WTOP radio.

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 | 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 , 2comments

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