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Tax Tip of The Week | Did You Know All Ohio Businesses Must File An Annual Report of Unclaimed Funds? October 23, 2019

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

It’s that time of year again…

Time to report unclaimed funds! This one really gets business owners excited (sarcasm intended).

As stated by the Ohio Department of Commerce, “All businesses that are located and/or operate in the State of Ohio, or hold funds due to Ohio residents, are required to file an Annual Report of Unclaimed Funds.”

Unclaimed Funds Reports are due by November 1st.

The Ohio Treasury wants Ohioans to recover money that is rightfully theirs. Every year 200,000 Ohioans lose track of their funds. They either put money in financial institutions and forget about it, or simply cannot track it in their records.

What is the Division of Unclaimed Funds?

The Ohio Department of Commerce, Division of Unclaimed Funds exists to protect money lost by Ohioans in various financial institutions, find the people the money belongs to, and then returns it as quickly as possible. More than $1 billion currently is in the custody of the Division of Unclaimed Funds. The Ohio Treasury makes Ohioans aware of the Division of Unclaimed Funds, so that they get back money rightfully theirs. You can perform a search using the following link:

SEARCH UNCLAIMED FUNDS

What types of accounts qualify as unclaimed funds?

We have a document from the Ohio Department of Commerce that helps explain what qualifies as “unclaimed funds,” as well as how to report them, here:

 HOW TO FILE AN UNCLAIMED FUNDS REPORT

Even if you have no unclaimed funds to report, a negative report must be filed.

What happens if your Ohio-based company does not report?

According to the Ohio Department of Commerce:

“For failing to report unclaimed funds or underreporting unclaimed funds, the company may incur civil penalties of $100.00 per day. The company may also have to pay interest at a rate up to 1% per month on the balance of unclaimed funds due per Ohio Revised Code section 169.12.”

What is NAUPA?

The National Association of Unclaimed Property Administrators (NAUPA) is a non-profit organization that maintains a national database, called Missing Money, to help people find unclaimed property.

MISSING MONEY

For additional assistance, contact the Ohio Department of Commerce’s Division of Unclaimed Funds at 1-877-644-6823.

Still struggling in determining how to file an Unclaimed Funds Report?

At Bradstreet & Associates and Bradstreet & Company CPAs, we’re here to help. If you need assistance filing your report, please call our Xenia office at 937-372-3504 or our Centerville office at 937-436-3133.

A complete information booklet on Reporting Unclaimed Funds is available here:
http://www.com.ohio.gov/documents/unfd_AnnualReportOfUnclaimedFunds.pdf

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 Co-Authors – Bobbie Haines & Linda Johannes, CPA

–until next week.

Tax Tip of the Week | Could You or Someone You Know Be Missing Out On Earned Income Credit? October 16, 2019

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

The Earned Income Tax Credit aka EIC is a benefit in the form of an income tax credit designed for working people with low to moderate income. To be eligible, one must meet certain requirements including filing an income tax return even if a tax return was not otherwise necessary to file. EIC is a refundable tax credit which means that a refund may be due you even if a tax liability did not exist. This credit may be as much as $6,431 so we can be talking about some real money. Although, the calculation is not complex, there are enough moving parts that estimating it short of preparing the income tax return is difficult. Many people miss out on this credit by not filing. Too often, a taxpayer looks at the tax return filing requirements and concludes filing a return is not necessary because their income is below the filing threshold. In many of these instances, the taxpayer may be walking away from a very significant refund.

The below Detroit Free Press article by Susan Tomporat was published on February 7, 2019. It provides additional information on the Earned Income Credit.

                                                     -Mark Bradstreet

The Earned Income Tax Credit is the biggest single check many working families see in a year. But they have to file a tax return — and be aware of the credit — to get the money.

Three years ago, low- to moderate-income households in Detroit left upwards of $80 million in unclaimed money by not claiming the credit. It was estimated that about 26,000 Detroit households were eligible for the credit but did not file tax returns to apply.

After a targeted awareness campaign that began in 2017, though, city officials say an average of 13,500 more Detroit residents each year have claimed their EITC. On average, $63 million more is being claimed each year. 

About $300 million has been claimed on average annually for the 2016 and 2017 tax years by Detroiters. The average EITC Refund: $4,600. The amounts represent a combination of state and federal earned income tax credits. 

Nearly 88,000 returns for Detroiters included the Earned Income Tax Credit. 

“It was a blessing to learn about this tax credit,” said Renee Perkins, 29, who works at MGM Grand Detroit at game tables dealing cards.

Perkins, a single mother with two children ages 7 and 1, expects to receive a tax refund of about $6,000 this year for state and federal taxes. It’s money she plans to save and use one day toward opening her own business offering assisted living to the elderly.

In the past, she has used the credit to pay down her debt and also put a down payment on a home once owned by the Detroit Land Bank.

“The extra cash helped me to accomplish a lot,” she said Tuesday as part of an awareness campaign event held at Focus: HOPE in Detroit.

Even so, the credit still remains overlooked by thousands of families. Here’s what you need to know:

Who qualifies to get the credit?

You must have earned income from a job and meet other requirements. For example, both your earned income and your adjusted gross income must be less than $45,802 in 2018 to qualify if you are single and have two qualifying children.

The limit is less than $51,492 for married couples filing a joint return with two qualifying children.

What’s the credit worth? 

The credit, for example, can be worth up to $6,431 this year for a working couple who qualifies with three or more children. 

But the size of the tax refund would vary considerably depending on your income, filing status and the number of qualifying children claimed on the tax return. 

To claim the credit, a tax return must be filed. 

The refundable tax credit enables tax filers to get back more from the federal government than you paid in taxes, so there’s a good chance for a significant refund. 

Nationwide, 25 million eligible workers and families received about $63 billion in the Earned Income Tax Credit during 2018. 

The average amount of EITC received nationwide was about $2,488.

Do you need a child to get the credit? 

No. But the income limits and the actual amount of the credit are significantly lower for those without children. 

The credit ranges from $2 to $519 for those with no qualifying children.

If you do not have children, your earned income and adjusted gross income must be less than $15,270 if you’re single to qualify for the credit. The limit is $20,950 for those who have no children and are married filing a joint return. 

Special EITC rules also apply for calculating the credit for those receiving disability benefits or have a qualifying child with a disability, members of the military, and ministers or members of the clergy. 

Why don’t people file for the credit?

Some don’t understand the credit. They might not have qualified in other years but may qualify now because their income has fallen. 

Some people think they just paid their taxes through payroll withholding and don’t need to file a return. They don’t understand how the complex credit can help get them more money.

Some people who don’t make a lot of money may not actually be required to file a federal income tax return. 

For some people, things could be more confusing this tax season. 

Under the new tax rules, the filing requirement thresholds have increased on 2018 returns somewhat because of the new standard deductions, according to Marshall Hunt, certified public accountant and director of tax policy for the Accounting Aid Society’s tax assistance program in metro Detroit.

“For example, as a general rule, a single person under 65 is required to file with gross income of $12,000 or more,” Hunt said.

“And for a married filing joint couple under 65 it’s $24,000.”

Last year, he noted, the amounts were $10,400 and $20,800. However, many should file in order to get a refund of money through credits such as the Earned Income Tax Credit even if they’re not required to file, Hunt said.

Returns can be amended for up to three years for any unclaimed benefits.

Families and individuals with incomes up to $55,000 may be eligible for the Accounting Aid Society’s free full service tax help. If so, the service offers to prepare and file your federal, state and local income tax returns, and to ensure you receive all of your federal and state Earned Income Tax Credits.

When do you receive a tax refund? 

Early filers may have to wait longer than expected, if they’re claiming the Earned Income Tax Credit or the Additional Child Tax Credit on a tax return.

The Protecting Americans from Tax Hikes Act, passed in 2015, mandated that the Internal Revenue Service cannot issue tax refunds that benefit from the Earned Income Tax Credit or the Additional Child Tax Credit before mid-February. The mid-February rule was put into place to combat tax refund fraud. 

This tax season, the IRS said people will have to wait until at least Feb. 27 for refunds with those credits to be available in their bank accounts or on their debit cards via direct deposit. That’s if there are no other issues with their tax return.

Credit given to: Susan Tomporat.

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 | How Divorce Affects Social Security Benefits?? October 2, 2019

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

Social Security Benefits experts are difficult to find. I am not one. We understand the calculations of Social Security and Self Employment taxes along with some areas (and entity choices) in which they may be minimized. But, the nuances of Social Security Benefits do not fall directly into our world of income taxes, accounting and business consulting.

Social Security Benefits are complicated and a divorce increases this level of complexity.  Practically 50% of USA marriages end in divorces. The following article explains some of these rules and also walks us through an example of a divorced couple.

                                     -Mark Bradstreet

Here’s how a divorce can affect your Social Security situation.

A whopping 91% of Americans over the age of 50 don’t understand what factors determine the amount they can potentially receive in Social Security benefits, a survey from the Nationwide Retirement Institute found.

There are several factors that can affect how much you receive in Social Security benefits, such as the age at which you claim benefits, whether you continue working after you claim benefits, and how much you earned during the years you paid into Social Security.

One factor that’s easy to overlook, however, is divorce. If you are currently divorced and were married for at least 10 years, you or your ex-spouse could be earning more in Social Security benefits than you think.

How divorce affects Social Security

Not all divorced couples are eligible to receive additional benefits once they start claiming Social Security, and there are certain requirements you’ll have to meet.

The first thing to consider is how your benefits compare to your ex-spouse’s. If you’re receiving more in Social Security benefits than your ex-spouse (or if you haven’t claimed yet but are expected to receive more than your ex-spouse), you’re not eligible for any additional money each month. But if you’re receiving less each month than your ex, you may be eligible for an increase in benefits based on your ex-spouse’s work record.

Assuming you’re receiving less than your ex-spouse in benefits, there are a few other requirements you’ll need to meet. First, you and your former spouse need to have been married for at least 10 years, and you cannot currently be married (although it doesn’t matter whether your ex-spouse has remarried or not). In order to start claiming benefits, you also need to be at least 62 years old.

If you and your ex-spouse are old enough to file for benefits but your ex hasn’t claimed them yet, you can still claim your benefits based on their work record if you have been divorced for at least two years. Also, if you’re eligible for benefits based on your own work record, that money will be paid out first. Then if you’re also eligible to receive extra benefits based on your ex-spouse’s record, you’ll receive an additional amount each month.

Exactly how much extra you’ll receive depends on the age at which you claim. In order to receive the full amount you’re entitled to, you’ll have to wait until your full retirement age (FRA) – which is either age 66, 67, or somewhere in between. If you claim before then (as early as age 62), your benefits will be reduced. By waiting until your FRA, assuming you’re eligible to receive benefits based on your ex-spouse’s record, you can receive half of the amount he or she is receiving in benefits.

One last thing to keep in mind is that regardless of how much someone is receiving in benefits based on their ex-spouses record, it doesn’t affect how much the other person or their current spouse receives in benefits. So, if, say, your ex-wife is receiving benefits based on your record, you and your current wife’s benefits will not be reduced as a result.

Social Security in action: A hypothetical example

Figuring out whether you can claim benefits based on an ex-spouse’s record and calculating what you’d actually receive is complicated and confusing. So, let’s look at a hypothetical example to make it a little easier to understand.

Let’s say you and your husband were married 20 years, and you never remarried after the divorce. Your FRA is 67 years old, and if you claim at that age, you’d be receiving $1,000 per month based on your own work record and earnings. Your ex-husband, however, is currently receiving $2,500 per month in benefits. Because you were married at least 10 years, you’re unmarried now, and you’re eligible to receive less in benefits than your ex-spouse, you can apply for benefits based on your ex-husband’s record.

For simplicity’s sake, let’s say you wait until your FRA to claim. By doing so, you’ll receive the full $1,000 you’re entitled to based on your own record. Based on your ex-husband’s work record, you’re eligible to receive half of what he’s receiving, or $1,250 per month. With ex-spouse benefits, you’re not allowed to “double dip” – meaning you won’t receive your $1,000 plus $1,250 based on your ex-husband’s record. Rather, you’ll receive your $1,000 and an additional $250 per month so that your total benefit amount is equal to half of what your ex-spouse is receiving in benefits.

Also, all the normal Social Security restrictions still apply here. So, if, for example, you claim earlier than your FRA, your benefits will be reduced. And if you continue working after claiming benefits, you may see a (temporary) reduction in benefits as well, depending on how much you’re earning.

Social Security benefits can seem complex, and there are many factors that contribute to how much you’ll receive each month. But by understanding how much you’re entitled to and whether you’re eligible for additional benefits, you can maximize your monthly checks – and enjoy a more financially stable retirement.

Credit given to:  Katie Brockman, The Motley Fool This was published on July 1, 2019

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 | Health Care Plans Gain More Flexibility August 14, 2019

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

On June 13, 2019, the IRS issued final regulations regarding health reimbursement arrangements (HRAs).  These types of plans were radically changed and restricted by the Affordable Care Act. The new regulations reinstate the ability of employers to use HRAs to reimburse employees who buy their own health insurance, but the rules can be fairly complicated in certain situations. The full set of rules can be found in the federal register at https://www.federalregister.gov/documents/2019/06/20/2019-12571/health-reimbursement-arrangements-and-other-account-based-group-health-plans. In pdf form (and in typical IRS fashion), this article is 140 pages long. It appears to be a collaboration between the IRS, the Employee Benefits Security Administration, the Department of Labor, the Centers for Medicare & Medicaid Services, and the Department of Health and Human Services, and is titled “Health Reimbursement Arrangements and Other Account-Based Group Health Plans”. 

Following is a nice (and much smaller) article published on June 24, 2019, by Jessica Kuester of Taft Stettinius & Hollister, LLP, which helps explain some of the provisions of the new rules, such as who can and cannot be covered, types of HRAs, effective dates, and other features and restrictions of the new HRA regulations.

                                                   –Norman S. Hicks, CPA

Final Regulations Allow Employers to Pay For Employees’ Health Insurance Premiums

Health reimbursement arrangements (HRAs) are a very flexible type of group health plan—they allow employers to reimburse employees for certain medical expenses on a pre-tax basis. Based on the IRS’s interpretation of changes in law that were enacted by the Affordable Care Act (ACA), these arrangements lost most of the flexibility that they had been able to provide for over 50 years. Although HRAs could be integrated with major medical plans offered by employers (i.e., a so-called “integrated HRA”), they could not be offered on a stand-alone basis without the employer incurring a $36,500 per year per participant excise tax. In effect, this meant that employers could no longer reimburse employees for the cost of premiums incurred when purchasing health insurance. New regulations (issued on June 13, 2019) bring back some of the flexibility of HRAs.

What is the new type of HRA?

In a so-called “individual coverage HRA,” employers can reimburse employees for medical expenses (including premiums) that they incur on a pre-tax basis. For each month that they are covered by the individual coverage HRA, employees must be covered by individual health insurance (either offered on the ACA Exchange or not), and employers must substantiate such coverage.

Who can be covered by an individual coverage HRA?

An individual coverage HRA cannot be offered to any employee offered a traditional employer-sponsored group health plan. This means that employees cannot be given a choice between the employer’s traditional group health plan and an individual coverage HRA—employers can only offer one or the other. However, employers can decide to offer an individual coverage HRA to one or more class of employees and a traditional group health plan to the other classes. The acceptable classes are full-time employees, part-time employees, seasonal employees, employees working in the same geographic location (such as the same state or same insurance rating area), collectively bargained employees, salaried employees, hourly employees and newly-hired vs. existing employees. These are only a few examples: there are other types of classes identified in the regulations and additional classes can be formed by combining any of the acceptable classes. In addition, minimum class size rules (generally, 20 class members) apply to employers offering a traditional group health plan to some classes and an Individual Coverage HRA to other classes.

How much can employers reimburse under an individual coverage HRA?

Just like with other types of HRAs, employers can reimburse as much or as little as they want. However, the individual coverage HRA must be offered on the same terms to all employees in the class. So although the amount of reimbursement can vary between classes, they generally cannot vary among the class members (except for variations based on an employee’s age or the number of dependents).

How do employers offer an individual coverage HRA?

Employers offering an individual coverage HRA must notify eligible participants about the individual coverage HRA and its interaction with the premium tax credit that is available to certain individuals under federal tax law. Although the individual coverage HRA itself is considered an employer-sponsored group health plan, the underlying health insurance coverage purchased by the employee is not, so long as the employee’s purchase of the insurance coverage is voluntary, the employer does not select or endorse any particular insurance carrier or coverage, the employer does not receive any kickbacks for an employee’s selection of any particular individual health insurance and each employee is notified annually that the individual health insurance they select is not subject to ERISA.

What about the employer mandate?

The good news: an employer’s offer of reimbursement through an individual coverage HRA counts as an offer of coverage for purposes of the ACA’s employer mandate. The bad news: although the new regulations offer guidance on when an individual coverage HRA will be considered “affordable” for purposes of the premium tax credit, the IRS has not yet issued rules describing when the coverage will be considered “affordable” for purposes of the employer mandate. These rules are likely coming soon.

Are there any other types of new HRAs available under the new regulations?

The new regulations also create an excepted benefit HRA. The excepted benefit HRA is different than the individual coverage HRA in that it only reimburses the employee for costs incurred in connection with “excepted benefits” (such as dental and vision benefits). This new excepted benefit HRA is an HRA offered as part of an employer’s traditional group health program and can reimburse medical expenses even when the employee opts out of the group health plan itself. This is a departure from the current rules that apply to integrated HRAs, which only permit reimbursement of medical expenses when the employee actually enrolls in the group health plan.

The excepted benefit HRA:

When can employers start offering these new types of HRAs?

The new types of HRAs can be offered beginning on Jan. 1, 2020. Note that, in order to start offering coverage under the individual coverage HRA on that date, employers will need to take action before then.  Most notably, the required notice must be provided prior to Jan. 1, and employees will need to take part in the 2020 open enrollment period for individual coverage, which typically occurs in late 2019.

Jessica E. Kuester is an attorney with Taft Stettinius & Hollister, LLP and represents employers in all of their employee benefit needs. She can be reached at jkuester@taftlaw.com. Her article, as reproduced above, can be found at https://www.taftlaw.com/news-events/law-bulletins/final-regulations-allow-employers-to-pay-for-employees-health-insurance-premiums.

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 – Norman S Hicks, CPA

–until next week.

Tax Tip of the Week | New Tax Laws Benefit Retirees May 22, 2019

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

The tax year of 2018 was the first full year for some tax savings that may benefit retired taxpayers more than some other groups. Some of these possible benefits follow:

1.    Higher standard deduction – for those retirees that have paid off their home mortgage may now have difficulty in itemizing their deductions. But, no matter – the new higher standard deduction which has practically doubled from 2017 to 2018 is more likely worth more in tax savings than being able to itemize as before.  
2.    Taxpayers aged 70 ½ and older may transfer up to $100,000 to charities from their IRAs even if unable to itemize. These contributions may count toward their RMD – BUT, the withdrawal doesn’t count as taxable income. An added benefit is that making donations in this fashion holds down your adjusted gross income which can help save on taxes on Medicare premiums, investment income and social security benefits. 
3.    Higher gift tax exemptions are available. The annual gift exclusion for 2019 is $15,000. So, any annual gifts made less than $15,000 do not require a gift tax return. Above that amount, a gift tax return is required, but typically, no gift tax is paid, unless working with a high net worth individual that is making lifetime gifts exceeding $11.4 million. A sunset provision exists where in 2026 – gift and estate tax provisions revert back from the $11.4 million to the pre-2018 levels of $5.49 million per person.  

The article that follows, Tax Overhaul Gives Retirees Some Relief further discusses the above in greater depth and includes some additional benefits. It was authored by Anne Tergensen and published by the WSJ on April 12, 2019.  
                                        –    Mark Bradstreet

Taxpayers are now filing their first returns based on the tax law Congress enacted in 2017. For retirees, the largest overhaul of the U.S. tax code in three decades has created new opportunities to cut taxes, along with some potential headaches.

Here are important changes retirees should be aware of and steps they can take to reduce their future tax bills.

1.    Higher standard deduction:

Many retirees, especially those who have paid off mortgages, take the standard deduction. For them, one positive change is the near-doubling of this deduction, or the amount taxpayers can subtract from their adjusted gross income if they don’t itemize deductible expenses including state taxes and charitable donations.

For individuals, the standard deduction is $12,000 for 2018 and $12,200 for 2019, up from $6,350 in 2017. For married couples, it is $24,000, rising to $24,400 for 2019, up from $12,700 in 2017. People 65 and older can also take an additional standard deduction of $1,600 (rising to $1,650 in 2019) or $2,600 for married couples. The expanded standard deduction expires at the end of 2025.

2.    A tax break for charitable contributions:

Retirees who take the standard deduction can still claim a tax benefit for donating to charity.

Taxpayers age 70½ or older can transfer up to $100,000 a year from their individual retirement accounts to charities. These donations can count toward the minimum required distributions the Internal Revenue Service requires those taxpayers to take from these accounts. But the donor doesn’t have to report the IRA withdrawal as taxable income. This can help the taxpayer keep his or her reported adjusted gross income below thresholds at which higher Medicare premiums and higher taxes on investment income and Social Security benefits kick in. People over 70½ who itemize their deductions can also benefit from such charitable transfers, said Ed Slott, an IRA specialist in Rockville Centre, N.Y.

3.    More options for 529 donors:

The new law allows taxpayers to withdraw up to $10,000 a year from a tax-advantaged 529 college savings account to pay a child’s private-school tuition bills from kindergarten to 12th grade.

For parents and grandparents who write tuition checks, saving in a 529 has advantages. The accounts, which are offered by states, allow savers to make after-tax contributions that qualify for state income tax breaks in many states and grow free of federal and state taxes. Withdrawals are also tax-free if used to pay eligible education expenses.

As in prior years, donors who want to give a child more than the $15,000 permitted under the gift-tax exemption can contribute up to five times that amount, or $75,000, to a 529. (They would then have to refrain from contributing for that child for the next four years.)

About a dozen states don’t allow tax-free withdrawals from 529s for private K-12 school tuition, so check with your plan first, said Mark Kantrowitz, publisher of Savingforcollege.com.

4.    Higher gift-tax exemption:

The tax overhaul includes a sweet deal for ultrawealthy families. For the next seven years, the gift-tax exemption for individuals is an inflation-adjusted $11.4 million, up from $11.18 million in 2018 and $5.49 million in 2017. For couples, it is $22.8 million, up from $22.36 million in 2018 and $10.98 million in 2017.

Congress also raised the estate-tax exemption to $11.4 million per person today from $5.49 million in 2017. As a result, taxpayers can give away a total of $11.4 million tax-free, either while alive or at death, without paying a 40% gift or estate tax.

Because in 2026 gift- and estate-tax exemptions are set to revert to pre-2018 levels of $5.49 million per person adjusted for inflation, individuals with assets above about $6 million—and couples with more than $12 million—should consider making gifts, said Paul McCawley, an estate planning attorney at Greenberg Traurig LLP.

The sooner you give assets away, the more appreciation your heirs can pocket free of gift or estate tax, Mr. McCawley said.

The Treasury Department and the IRS recently issued proposed regulations that would grandfather gifts made at the higher exemption amount between 2018 and 2025 after the exemption reverts to pre-2018 levels.

5.    Less generous medical-expense deduction:

For 2018, taxpayers can deduct eligible medical expenses that exceed 7.5% of adjusted gross income. That means for someone with a $100,000 income and $50,000 of medical or nursing-home bills, $7,500 is not deductible.

In 2019, the threshold for the medical deduction is slated to rise to 10% of adjusted gross income. That would leave the person above unable to deduct $10,000 of medical bills. One way to reduce the pain is to take advantage of the tax break available to people 70½ or older who make charitable transfers from IRAs, said Mr. Slott. Because the donor doesn’t have to report charitable IRA transfers as taxable income, a $5,000 gift would reduce a $100,000 income to $95,000. That, in turn, would mean $9,500 of medical expenses are ineligible for the deduction in 2019, rather than $10,000.

6.    Goodbye to Roth re-characterizations:

The legislation ended the ability of savers to “undo” Roth IRA conversions, which had been used to nullify certain IRA-related tax bills.

With a traditional IRA, savers typically get a tax deduction for contributions and owe ordinary income tax on withdrawals. With a Roth IRA, there is no upfront tax deduction, but withdrawals in retirement are usually tax-free. Tax-free withdrawals are attractive since they don’t push the saver into a higher tax bracket or trigger higher Medicare premiums.

Savers can convert all or part of a traditional IRA to a Roth IRA, but they owe income tax on the taxable amount they convert in the year they convert. Until the overhaul, savers could undo a Roth conversion—and cancel the tax bill—within a specific time frame. But under the new tax law, Roth conversions can no longer be undone.

That doesn’t mean converting is no longer worthwhile, Mr. Slott said. But people should be careful to convert only an amount they know they can afford to pay taxes on.

Credit Given to:  Anne Tergesen. You can write to Anne Tergesen at anne.tergesen@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 |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