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Tax Tip of the Week | Should You Gift Land (or Anything Else) in 2019? November 20, 2019

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

Our current lifetime estate and gift exemption is currently $11.4 million per person (indexed for inflation) through 2025. In other words, you may gift or have an estate of that value without any gift or estate tax. And, your spouse also has the same $11.4 million exemption. So, each couple has a combined total exemption of $22.8 million per couple. This current lifetime exclusion has never been higher. But as the old saying goes – nothing is forever. The House has proposed a new bill to carve 2 years from the 2025 sunset provision. Some of the Presidential candidates propose ending this $11.4 million exemption even sooner than 2023 as proposed by the House.

Considering the current law, pending tax proposals and campaign trail promises, one may make a good argument, that 2019 may be as good of a year as ever to consider making a gift. Please remember that you may make an annual gift of up to $15 thousand a person(s) without it counting against your lifetime exclusion of $11.4 million and your spouse may likewise do the same.

                                     –    Mark Bradstreet

“Tax reform doubled the lifetime estate and gift exemption for 2018 through 2025. This means in 2019, you can gift during your lifetime or have assets in your estate of $11.4 million and not owe any estate or gift tax. Your spouse has the same amount. However, many states continue to assess an estate tax. Be sure to check on your state’s rules (Note: currently Ohio does not have an estate tax.)

This means farm couples worth $30 million or more won‘t owe any estate or gift tax. Discounts of around 30% (or more) reduce the value of land (or other assets) put into a limited liability company (LLC) or another type of entity. Gifts during your lifetime will shrink the amount subject to an estate tax.

Understand The Numbers

For example, mom and dad have farmland and other assets worth $30 million. They place the land into an LLC with a gross value of $20 million. This qualifies for a 35% discount ($7 million), dropping the estate valuation to $13 million. This drops their taxable estate to $23 million, which is about equal to their combined lifetime exemption amounts.

However, there is a chance the lifetime exemption will go back to the old numbers (or even less). The House has proposed a new bill that will make the exemption revert to the old law two years earlier. Some Presidential candidates propose making it even sooner or perhaps reducing it even lower (some would like to see it go to $3.5 million).

Let’s look at our previous example. If the exemption amount reverts to the old numbers, the heirs would face an estate tax liability of about $5 million. But if they make a gift of about $12 million now, no estate tax would be due.

Now might be the time to consider gifting some of your farmland to your kids, grandkids or into some type of trust. We normally like to have grain, equipment and other assets go through an estate so we can get a step-up in basis and a new deduction for the heirs.

However, farmland is not allowed to be depreciated. If it will be in the family for multiple generations, a step-up does not create any value anyway.

If your net worth is more than $10 million, now is a good time to discuss this with your estate tax planner. If you wait and the rules change, you could cost your heirs a lot of money.

Gifting Assets is Powerful

Remember you and your spouse can give $15,000 each year to as many people as you’d like in the form of gifts (not a total of $15,000 each year). This does not eat into your lifetime exemption. As a result, it is a smart strategy to take advantage of gifting each year.

For instance, if mom and dad have five kids, each married, they can give $150,000 total (including spouses, or children and spouses) without filing a gift tax return or eating into their lifetime exemption amount.

Credit is given to Paul Neiffer. This article was published in the Farm Journal article in September, 2019.  Paul gives some great examples and further commentary on this topic.  

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 C. Bradstreet, CPA

–until next week.

Tax Tip of the Week | What Type of Entity Should I Be? October 30, 2019

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

Clients who are starting a business often ask us “What type of entity should I be?” While there is no definitive answer, this tax tip will cover some of the more common choices that can be made, and some of the concerns and tax treatment of those choices.

When an individual starts a business and is the only owner, if that person does nothing else tax-wise, the business is treated as a sole-proprietorship, meaning the taxpayer files a Schedule C as part of his or her annual Form 1040. If two or more people start a business, and do nothing else, the business is treated as a partnership, and files a partnership return, Form 1065.

Many clients are concerned about legal protection and will ask “Should we incorporate?” The answer, as it is with most tax questions, is “it depends”. While corporations arguably provide the most legal protection of any entity, they are also a bit more costly to form than other entities, and can be a bit more cumbersome to operate. According to Nellie Akalp, in an article published in the CPA Practice Advisor on October 10, 2019, she states “the law requires a corporation to:

•    Select a Board of Directors, meet with the board regularly and keep detailed meeting minutes.
•    Formally register the business by filing Articles of Incorporation with the state.
•    Obtain a Tax ID Number or Employer Identification Number (EIN) from the IRS.
•    Draft corporate bylaws.  Corporate bylaws are the official rules for operating and managing the company, proposed and voted on by the Board.”

Prior to 2018, corporate tax rates were graduated, the highest rate being 35%. The Tax Cuts and Jobs Act (TCJA) enacted in late 2017, changed the corporate tax rate to a flat 21% which was good for some, but not all. Corporations making less than $50,000 per year actually got a tax increase. Previously, the tax rate for this bracket was 15% so these corporations now have to pay 6% more in federal tax. Another consideration is the “double-taxation” of money taken out by the owners. Dividends paid to shareholders are not deductible by the corporation, and are taxed to the recipient.

For those who don’t want the formalities and expense of forming and operating a C corporation, forming a Limited Liability Company (LLC) can be an attractive alternative.  We have had new clients tell us they are incorporated, which we usually verify on the Ohio Secretary of State’s website, only to find out they are really an LLC. An LLC is not an incorporated entity, but does provide a layer of protection. If a business is sued, and has not incorporated or become an LLC, the owner’s personal assets can be at risk. A single-member LLC, absent any other elections, files a Schedule C, just as a sole-proprietor does. A multi-member LLC, absent any elections, files a partnership return, Form 1065. If desired, a single-member or multi-member LLC can elect to be taxed as a corporation by filing IRS Form 8832, Entity Classification Election.

Another election that can be made by either an LLC, or a corporation, is the election to be taxed as an S Corporation. This is just a taxation election and doesn’t change the type of entity making the election. The election is made by filing Form 2553, Election by a Small Business Corporation. The title of this form is somewhat of a misnomer because it indicates that only a corporation can make the election. Not only can small corporations make the election, but so can LLC’s.

Dividends paid by an S corporation (normally called distributions when made by an S corporation) generally are not taxable to the recipients (unless there are basis issues), which avoids the double-taxation issue of C corporations. The net profits of an S corporation are not taxed at the corporate level, but instead are passed through to the owners, and are taxed on their individual returns, regardless of whether any distributions were made. And this net profit is not subject to self-employment tax (FICA taxes) as is Schedule C income and partnership income reported by an active individual. Not all of the S corporation’s profits can be taken as distributions however. The IRS requires owners who are active in the business to take a reasonable salary. The salary, of course, has FICA taxes withheld, and the company has to pay matching FICA taxes as with any employee.

According to Nellie Akalp, “To qualify for S-Corp status:

•    The business must be a U.S. corporation or LLC
•    It can maintain only one class of stock
•    It’s limited to 100 shareholders or less
•    Shareholders must be individuals, estates or certain qualified trusts
•    Each shareholder must consent in writing to the S Corporation election
•    Each shareholder must be a U.S. Citizen or permanent resident alien with a valid United States Social Security number
•    The business must have a tax year ending on December 31”

The TCJA provided for a new deduction beginning in 2018 called the Qualified Business Income Deduction. This deduction is available for most types of “pass-through” business income and is limited to 20% of qualified business income provided certain qualifications are met. Because it is for “pass-through” income, C corporations do not get any benefit. Most other types of business income do qualify, such as sole-proprietors, partnerships, LLC’s and S corporations. So this is yet another consideration when deciding on the type of entity a business should be.

As you can see, there are several types of entities and quite a bit to consider when making the entity choice. Hopefully this article helps to give you some perspective.

Credit given to Nellie Akalp for the excerpts taken from her article “Why Small Businesses May Want to Consider Electing S Corp Status” published in the CPA Practice Advisor on October 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 – Norman S Hicks, CPA

–until next week.

Tax Tip of the Week | A Need to Know on Capital Gains Taxes September 4, 2019

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

Generally, capital assets that are held in excess of one year and sold at a profit may be taxed at three (3) possible tax rates: (1) 0%, (2) 15% or (3) 20%. For most people, the rate used depends upon their filing status and the amount of their taxable income. Gains from the sale of capital assets not held for a year are taxed as ordinary income. If capital assets are sold at a loss – generally, only $3,000 ($1,500 married filing separate) may be deducted annually unless other capital gains are available as an offset.

Everyone thinks that Congress designed the zero-percent capital gain rate just for them. That thinking is only natural since so many reporters and so many politicians have over-hyped the catchy expression of “zero-percent rate.” The truth is VERY few taxpayers will ever be in position to take advantage of the zero-percent long-term capital gain rate. To do so, for most single and married couples filing jointly, their taxable income not including the capital gains must be less than $39,375 or $78,750, respectively. Remember your taxable income might include any Form W-2s, interest and dividend income, business and rental income etc. But, it also includes the capital gain itself. So, not a very big window exists for the possibility of qualifying for using the zero-percent rate. If your income other than capital gains, less your deductions exceeds these taxable income ceilings then the window not only shuts but disappears as though it never existed. This capital gain tax calculation is not made the same as the calculation of income taxes which are calculated using the incremental tax brackets. And, depending upon the amount of your regular taxable income not including the capital gains above and beyond the amounts of $39,375/$78,750 – you will then use either the 15% OR the 20% tax bracket for the capital gains rate. Don’t forget the “net investment income tax” of 3.8% which could be an additional tax along with your particular state income tax. Ohio taxes capital gains as ordinary income. Also, technically outside the tax world – various income levels may also affect the amount of your Alternative Minimum Tax (AMT), Medicare insurance premiums and the amount of student loan repayments (if applicable).

More information and explanations follow in the article below by Tom Herman as published by the Wall Street Journal on Monday, June 17, 2019.

                            -Norm Hicks and Mark Bradstreet

By tax-law standards, the rules on capital-gains taxes may appear fairly straightforward, especially for taxpayers who qualify for a zero-percent rate.

But many other taxpayers, especially upper-income investors, “often find the tax law around capital gains is far more complicated than they had expected,” says Jordan Barry, a law professor and co-director of graduate tax programs at the University of San Diego Law School.

Here is an update on the brackets for this year and answers to questions readers may have on how to avoid turning capital gains into capital pains.

Who qualifies for the zero-percent rate?

For 2019, the zero rate applies to most singles with taxable income of up to $39,375, or married couples filing jointly with taxable income of up to $78,750, says Eric Smith, an IRS spokesman. Then comes a 15% rate, which applies to most singles up to $434,550 and joint filers up to $488,850. Then comes a top rate of 20%.

But don’t overlook a 3.8% surtax on “net investment income” for joint filers with modified adjusted gross income of more than $250,000 and most singles above $200,000. That can affect people in both the 15% and 20% brackets. For those in the 20% bracket, that effectively raises their top rate to 23.8%. “That 23.8% rate is the rate we use to plan around for high net-worth individuals,” says Steve Wittenberg, director of legacy planning at SEI Private Wealth Management.

There are several other twists, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. Among them: a maximum of 28% on gains on art and collectibles. There are also special rates for certain depreciable real estate and investors with certain types of small-business stock. See IRS Publication 550 for details. There also are special rules when you sell your primary residence.

State and local taxes can be important, too, especially in high-tax areas such as New York City and California. This has become a much bigger issue in many places, thanks to the 2017 tax overhaul that included a limit on state and local tax deductions. As a result, many more filers are claiming the standard deduction and thus can’t deduct state and local taxes. But some states, including Florida, Texas, Nevada, Alaska and Washington, don’t have a state income tax. Check with your state revenue department to avoid nasty surprises.

How long do I typically have to hold stocks or bonds to qualify for favorable long-term capital-gains tax treatment?

More than one year, says Alison Flores, principal tax research analyst at The Tax Institute at H&R Block. Gains on securities held one year or less typically are considered short-term and taxed at the same rates as ordinary income, she says. The rules are “much more complex” for investors using options, futures and other sophisticated strategies, says Bob Gordon, president of Twenty-First Securities in New York City. IRS Publication 550 has details, but investors may need to consult a tax pro.

The holding-period rules can be important for philanthropists who itemize their deductions. Donating highly appreciated shares of stock and certain other investments held more than a year can be smart. Donors typically can deduct the market value and can avoid capital-gains taxes on the gain. But don’t donate stock that has declined in value since you purchased it. “Instead, sell it, create a capital loss you can use, and donate the proceeds” to charity, Mr. Gordon says. You can use capital losses to soak up capital gains. Investors whose losses exceed gains may deduct up to $3,000 of net losses ($1,500 for married taxpayers filing separately) from their wages and other ordinary income. Carry over additional losses into future years.

If you sell losers, pay attention to the “wash sale” rules, says Roger Young, senior financial planner at T. Rowe Price . A wash sale typically occurs when you sell stock or securities at a loss and buy the same investment, or something substantially identical, within 30 days before or after the sale. If so, you typically can’t deduct your loss for that year. (However, add the disallowed loss to the cost basis of the new stock.) Mr. Young also says some investors may benefit from “tax gain harvesting,” or selling securities for a long-term gain in a year when they don’t face capital-gains taxes.

While taxes are important, make sure investment decisions are based on solid investment factors, not just on taxes, says Yolanda Plaza-Charres, investment-solutions director at SEI Private Wealth Management. And don’t wait until December to start focusing on taxes.

“We believe in year-round tax management,” she says.

What if I sell my home for more than I paid for it?

Typically, joint filers can exclude from taxation as much as $500,000 of the gain ($250,000 for most singles). To qualify for the full exclusion, you typically must have owned your home—and lived in it as your primary residence—for at least two of the five years before the sale. But if you don’t pass those tests, you may qualify for a partial exclusion under certain circumstances, such as if you sold for health reasons, a job change or certain “unforeseen circumstances,” such as the death of your spouse. See IRS Publication 523 for details. When calculating your cost, don’t forget to include improvements, such as a new room or kitchen modernization.

Credit given to Tom Herman. This article appeared in the June 17, 2019, print edition as ‘A Need to Know on Capital-Gains Taxes.’ 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 & Norman S. Hicks, CPA

–until next week.

Tax Tip of the Week | Can S Corporations Save Taxes? Apparently, Some Politicians Think So. August 21, 2019

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

In an effort to save federal income taxes, many people and not just some politicians route their business income through S corporations.  Their profits which may be retained by the S corporation and/or distributed to the shareholder(s) are typically the result of keeping the shareholder’s reasonable wages at a level that assures a corporate profit.  Keeping these reasonable wages below the FICA ceiling ($132,900 for 2019) may save taxes of 15.3% from FICA and Medicare, combined.  If, these wages exceed the FICA ceiling then the potential tax savings drop to only the Medicare tax of 2.9% plus another .9% if individual’s wages are over $200,000 ($250,000 married filing jointly).

The point to be made here is that at the right income levels, significant tax savings may exist with the proper use of an S corporation.  However, these savings come along with the possibility of additional IRS scrutiny.  And, since you may be paying less social security taxes, your future social security benefits may be dinged ever so slightly; but these tax savings are now in your own pocket.

The below WSJ article authored by Richard Rubin covers a portion of this age-old tax saving strategy along with some interesting commentary.

               -Mark Bradstreet

Democratic presidential candidate Joe Biden used a tax loophole that the Obama administration tried and failed to close, substantially lowering his tax bill.

Mr. Biden and his wife, Dr. Jill Biden, routed their book and speech income through S corporations, according to tax returns the couple released this week. They paid income taxes on those profits, but the strategy let the couple avoid the 3.8% net investment income tax they would have paid had they been compensated directly instead of through the S corporations.

The tax savings were as much as $500,000, compared to what the Biden’s would have owed if paid directly or if the Obama proposal had become law.

“As demonstrated by their effective federal tax rate in 2017 and 2018—which exceeded 33%—the Biden’s are committed to ensuring that all Americans pay their fair share,” the Biden campaign said in a statement Wednesday.

The technique is known in tax circles as the Gingrich-Edwards loophole—for former presidential candidates Newt Gingrich, a Republican, and John Edwards, a Democrat—whose tax strategies were scrutinized and drew calls for policy changes years ago. Other prominent politicians, including former President Barack Obama and fellow Democrat Hillary Clinton, as well as current contenders for the 2020 Democratic nomination Sens. Elizabeth Warren and Bernie Sanders, received their book or speech income differently and paid self-employment taxes.

Some tax experts have pointed to pieces of President Trump’s financial disclosures and leaked tax returns to suggest that he has used a similar tax-avoidance strategy.

Unlike his Democratic rivals and predecessors in both parties, Mr. Trump has refused to release his tax returns, and his administration is fighting House Democrats’ attempt to use their statutory authority to obtain them. Democratic presidential candidates have released their tax returns and welcomed criticism to draw a contrast with Mr. Trump.

“There’s no reason for these to be in an S corp—none, other than to save on self-employment tax,” said Tony Nitti, an accountant at RubinBrown LLP who reviewed the returns.

Mr. Biden, who was vice president from 2009 to 2017, has led the Democratic field in polls since entering the race. He is campaigning on making high-income Americans pay more in taxes and on closing tax loopholes that benefit the wealthy.

Mr. Biden has decried the proliferation of such loopholes since Ronald Reagan’s presidency and said the tax revenue could be used, in part, to help pay for initiatives to provide free community-college tuition or to fight climate change.

“We don’t have to punish anybody, including the rich. But everybody should start paying their fair share a little bit. When I’m president, we’re going to have a fairer tax code,” Mr. Biden said last month during a speech in Davenport, Iowa.

The U.S. imposes a 3.8% tax on high-income households—defined as individuals making above $200,000 and married couples making above $250,000. Wage earners have part of the tax taken out of their paychecks and pay part of it on their returns. Self-employed business owners have to pay it, too. People with investment earnings pay a 3.8% tax as well.

But people with profits from their active involvement in businesses can declare those earnings to be neither compensation nor investment income. The Obama administration proposed closing that gap by requiring all such income to be subject to a 3.8% tax, and it was the largest item on a list of “loophole closers” in a plan Mr. Obama released during his last year in office. The administration estimated that proposal, which didn’t advance in Congress, would have raised $272 billion from 2017 through 2026.

Under current law, S-corporation owners can legally avoid paying the 3.8% tax on their profits as long as they pay themselves “reasonable compensation” that is subject to regular payroll taxes. S corporations are a commonly used form for closely held businesses in which the profits flow through to the owners’ individual tax returns and are taxed there instead of at the business level.

The difficulty is in defining reasonable compensation, and the IRS has had mixed success in challenging business owners on the issue. The Bidens’ S corporations—CelticCapri Corp. and Giacoppa Corp.—reported more than $13 million in combined profits in 2017 and 2018 that weren’t subject to the self-employment tax, while those companies paid them less than $800,000 in salary.

If the entire amount were considered compensation, the Bidens could owe about $500,000. An IRS inquiry might reach a conclusion somewhat short of that.

“The salaries earned by the Bidens are reasonable and were determined in good faith, considering the nature of the entities and the services they performed,” the Biden campaign statement said.

For businesses that generate money from capital investments or from a large workforce, less of the profits stem from the owner’s work, and thus reasonable compensation can be lower. For businesses whose profits are largely attributable to the owner’s work, the case for reasonable compensation that is far below profits is harder to make.

To the extent that the Bidens’ profits came directly from the couple’s consulting and public speaking, “to treat those as other than compensation is pretty aggressive,” said Steve Rosenthal, a senior fellow at the Tax Policy Center, a research group run by a former Obama administration official.

Mr. Nitti said he uses a “call in sick” rule for his clients trying to navigate the reasonable-compensation question: If the owner called in sick, how much money could the company still make?

“The reasonable comp standard is a nebulous one,” Mr. Nitti said. “This is pretty cut and dried. If you’re speaking or writing a book, it’s all attributable to your efforts.”

The IRS puts more energy into cases where the business owners pay so little reasonable compensation that they owe the full Social Security and Medicare payroll taxes of 15.3%, Mr. Nitti said.

In a statement released Tuesday along with the candidate’s tax returns, the Biden campaign noted that the couple employs others through its S corporation and calls the companies a “common method for taxpayers who have outside sources of income to consolidate their earnings and expenses.”

Credit given to: Richard Rubin. This article was written July 10, 2019. You can write to Richard Rubin at richard.rubin@wsj.com—Ken Thomas contributed to this article.

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

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | Real Estate – Tax Basis April 24, 2019

Posted by bradstreetblogger in : Depreciation options, General, Section 168, Section 179, tax changes, Tax Tip, Taxes, Uncategorized , add a comment

In an earlier Tax Tip, different tax categories of real estate were briefly discussed. This week we will discuss how a tax gain or loss is treated upon sale by the various classifications as listed below:

1.    Principal residence – Your gain (loss) is calculated by subtracting your tax basis from your sales price. Your tax basis starts with your original cost, adds in any qualifying improvements, and includes most of the selling expenses you incur when sold. Provided certain tests are met, gain is excludable up to $500,000 on a joint return, or $250,000 for a single filer. Exception: Any depreciation taken after May 6, 1997 is usually taxable. Depreciation may have been taken on an office in the home or any business usage. Any loss upon the sale of a personal residence in non-deductible.

2.    Second home – Your tax basis is calculated in the same manner as a personal residence. Any gain is taxed as capital gain. No exclusion is allowed as with a personal residence. No one may designate more than one property as a personal residence. Just as with a personal residence, any loss upon the sale of a second home is non-deductible.

3.    Rental property – The tax basis is calculated in the same manner as a personal residence with one major exception.   Because rental properties are depreciated over time, basis has to be reduced by the depreciation allowed or allowable. Any gain on the sale of a rental property is taxed as capital gain. However, the gain attributable to the depreciation taken could be taxed as high as 25%. This in known as Section 1250 recapture. Any excess gain is taxed as normal capital gain with a maximum rate of 20%. A loss on the sale of a rental property is normally deductible as an ordinary loss (not subject to the $3,000 per year net capital loss limitation).

4.    Investment property – Depreciation is not normally allowed on investment property. A loss is deductible to the extent of capital gains plus $3,000 per year for joint or single filers, and $1,500 per year for a married filing separate return.

5.    Business property – Same as rental property above if owned individually.

6.    Gifted property – Your tax basis in a property received as a gift is the same as the basis was in the hands of the giver.

7.    Inherited property – Your tax basis in an inherited property is generally the fair market value of the property as of the date of death of the decedent, commonly called a “stepped-up basis”.

As noted above, gains and losses are often treated very differently depending upon the type of property. Please understand what your type of property is and that its character may change for a variety of reasons including your intentions. Being able to substantiate all of this may be important.

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 – Norman S. Hicks, CPA

–until next week.

10 Tips for Tiger Woods (Professional Athletes) and the New Tax Law April 17, 2019

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

The odds are good that this Tax Tip of the Week won’t reach more than a handful of professional athletes and maybe not even that many. Regardless, in the world of tax, many similarities exist between a professional athlete and an employee who travels around the country. Sadly, those similarities are the only things that I will ever have in common with the likes of Tiger Woods, Lebron James, Stephan Curry and Tom Brady. The commentary below was taken from an article dated April 23, 2018 by Travis Tandy who is a staff accountant with Ferguson, Timar & Co in Fullerton California. As you read through this article, please note that the tax laws are no different for you than for a professional athlete, especially if your job necessitates travelling between various taxing entities and you have been itemizing your deductions in the past.

                                                        – Mark Bradstreet

Whether you’ve provided tax and accounting services for professional athletes in the past or are just getting started, you’ll want to pay special attention to these 10 key issues that are unique to this type of client. Adding to the special circumstances these athletes have faced in the past year is the new tax law. Many business expenses that are common among professional athletes are no longer deductible or are limited. Tax planning opportunities abound for this type of client as we all sort through the ramifications of the new Tax Cuts and Jobs Act. Here are some of the many things you’ll face.

1. Jock Tax: Under the terms of what is commonly called the “Jock Tax,” athletes must report their income in each state in which they play. An additional challenge from a tax planning standpoint is player trades during the year. We may set up a tax plan, only to have the player traded to a different state or team in which they will play in an entirely different set of states.

2. Residency: Establishing residency can be most challenging for rookie players. Rookies are often young and unestablished outside of their parents’ home state. Veteran players have the benefit of choosing a permanent residency based on their tax situation. The key is to establish residency in a favorable county near the home stadium. Establishing residency can be done simply by finding a living space, obtaining a driver’s license in that state and setting up utilities in the player’s name. Many players choose states like Florida, Texas, and Washington that have no state tax requirements.

3. Charitable Giving/Non-profit: Players can take advantage of their status to help others through charitable giving. This allows them to support a cause close to their heart. You can help by explaining the value of maximizing charitable donations.

4. Agent Fees & Unions Dues: As of the tax year 2018, union dues and agency fees directly related to the generation of W-2 income no longer qualify as an itemized deduction. Rookie players have minimum dues exceeding $17,000 per year and agent fees of around 3%. These once-deductible items will need to be removed from the player’s tax plans moving forward, or different tax structures need to be explored. However, we are working diligently to review the NFL Collective Bargaining Agreement in conjunction with the new tax laws in hopes of changing the way this is handled.

5. Player Fines: Nobody wants to see a situation where a player does something to generate a fine against them. The fines are often donated in the name of the player, turning the fine into a tax deductible expense to the player. Fines not donated to a charity may be considered a necessary and ordinary business expense to the player, subject to new and limiting tax rules.

6. Athletic Equipment: Footballs, golf clubs, tennis rackets, racquetball rackets, basketballs, etc. are considered ordinary and necessary for the player to continue to play at a high level, and to maintain their employment with their team. Again, new tax rules cause us to reexamine the nature of this former itemized deduction. Look for professional athletes to start incorporating themselves to take advantage of more favorable tax provisions.

7. Royalties: Royalties can sometimes be a difficult issue with athletes. Most are unsure of the amount due to them through the year, making tax planning for royalty income a difficult task. Royalty deals also come and go based on player performance. A fluctuation in a multi-million dollar royalty deal can really change the outcome of the player’s tax situation.

8. Unknown increased salaries: It doesn’t happen all that often, but a veteran player may get sent to the injured list for the season. This means a lower paid backup player will be used to replace the player. Players moving from the bench to a starting position receive a significant increase in pay. This can cause a change in their current tax rate and plan.

9. Signing bonuses: The benefit of a signing bonus all comes down to the form in which the bonus is paid out. If the bonus is paid out properly by the league, it may not need to be included in state income.

10: Taxable Swag: Gifts or swag given to players is not truly a gift and it actually comes with a price tag. The items are almost always given in connection with an appearance or as a bonus for the player’s appearance. Unfortunately, the IRS will want a cut of that swag in the form of a tax payment. These fortunate events create additional taxable income for the players often overlooked in the excitement and lack of notice from the agency providing the swag.

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 | No. 327 | Expired Tax Provisions: No Relief in Sight? November 4, 2015

Posted by bradstreetblogger in : Depreciation options, General, Section 168, Section 179, tax changes, Tax Planning Tips, Tax Tip, Taxes, Taxes , add a comment

Tax Tip of the Week | November 4, 2015 | No. 327 | Expired Tax Provisions: No Relief in Sight?

For the last several years, taxpayers have faced great uncertainty determining whether they can depend on tax incentives to help them lower taxes.  These have become known as the “51 Tax Extenders”.  Last December, Congress extended most of these provisions for one year retroactively to the beginning of 2014, but not going forward, so they expired again at the end of 2014.

Unlike many previous years, Congress did not spend much time or effort this summer working to fix the extenders situation.  So, as we enter the last quarter of 2015, with most of the tax incentives expired, it’s a good time to review which provisions might get a last minute reprieve.

We will look at the major pending extenders for individuals, businesses and energy-related provisions:

Individuals
–    Educator’s $250 above-the-line deduction for classroom supplies
–    Exclusion from income for discharge of debt on a primary residence
–    Deduction for mortgage insurance premiums (PMI)
–    Deduction of sales taxes in lieu of state/local taxes
–    Special rules for capital gain treatment of conservation easements
–    Option to use above-the-line deduction for tuition expenses
–    Option for those over age 70.5 to make tax-free contributions in lieu of taking taxable RMDs.

Businesses
–    Research & Development credit
–    Employee wage credit for active duty and reserve military employees
–    15-year straight line cost recovery for leasehold improvements
–    Section 179 and Section 168 accelerated depreciation options on capital purchases

Energy-related tax incentives
–    Several credits for renewable and energy-efficient fuels
–    Several credits for energy-efficient building construction

If history is any guide, and Congress finally acts, it will be at the last minute. This makes tax planning on many issues nearly impossible.  With the election nearing, the situation this year may be worse than normal.

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

…until next week.