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Will the Sale of Your Home be Taxable? April 7, 2021

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

We all expect that no tax will be due some day when we sell our homes. At least, that is what all of our friends and family tell us. And, there is a good chance that they will be correct at least under today’s rules which are always subject to change. The below article gives us the story from the 30,000 foot view. And, as long as you have lived in your home for at least two (2) years out of the last five (5) years and your gain is below $250,000 – single / $500,000 – married filing jointly; then, you may not even need to report the transaction on your return, much less pay any taxes. 

But when the transaction involves anything out of the ordinary such as a gain in excess of $250,000 / $500,000; the property was formerly a rental; was used as your business property; used as an office in the home; you or your spouse are in the military or an involuntary conversion occurs – just to mention a few, things can get complicated very quickly and a lot of tax money may be potentially due. So do your homework BEFORE you sell your home to help avoid any unpleasant surprises.

The article below was written by Mr. Geoff Williams. It takes a deeper dive into some tax consequences of selling your home. 

– Mark Bradstreet

The IRS is often more benevolent than you would think in these matters.

If you’re thinking about selling your home, here’s what you need to know about the taxes you may owe.

YOU MAY HAVE THOUGHT about the tax benefits of buying a home, but you probably haven’t thought much about the taxes you’ll pay when you sell your home. As you can imagine, the taxes on a home sale could theoretically be a small fortune, enough to almost scare you away from selling at all.

So, if you’re looking to be proactive and prepared, here are answers to some questions you may have.

Can I Avoid Paying Taxes on a Sale of a Home?

Yes. There is a very good chance that you won’t pay taxes on your home sale. In fact, if you’ve been worrying about this, it may be for nothing.

When you make money from the sale of your home, the IRS typically lets home sellers keep the first $250,000 they earn from the sale of the house. (That’s $250,000 if you’re single; if you’re married and filing jointly, you get to keep $500,000 of capital gains.)

So, What Happens if the Capital Gains Are Higher Than the $250,000 or $500,000 Thresholds?

In that case, you may be subject to capital gains taxes.

Here’s a hypothetical scenario to give you a sense of how much you might pay if you sell a home for well over $500,000 as a married couple filing jointly.

According to David Reyes, financial advisor and CEO of Reyes Financial Architecture in San Diego, if you bought a house 10 years ago for $350,000 and sell it now for $1 million (a relatively reasonable hypothetical in California), “you would owe taxes on any amount over the $500,000 – which would be $150,000.”

As in, you would owe taxes on that $150,000 (rather than having a $150,000 tax bill).

That said, you can probably get that $150,000 number to shrink a bit. “The IRS allows you to deduct certain closing costs such as title insurance and attorney fees. You can also deduct the commission that you pay your real estate agent. You may also deduct any home improvements that you made to the property. This figure becomes your cost basis,” Reyes says.

Those home improvements, incidentally, could add up to a lot. Did you replace the roof recently? Did you add a swimming pool to your backyard, or perhaps renovate the kitchen or add a room to the house? Hopefully you saved the receipts.

Reyes says that after all these deductions, you would pay taxes on the net proceeds.

“Let’s say that your total of all eligible deductions is $50,000. You would pay capital gains taxes on the (remaining) $100,000,” Reyes says. “Depending on your tax bracket, you could pay taxes of up to 20% federal income taxes, plus state taxes. This would be a tax of $20,000, plus state income tax.”

State Income Tax?

Yes, you may have to pay state income tax with the sale of your home – but you shouldn’t when the federal taxes are exempt. Still, check with your tax preparer just to be sure. “Every state is different,” Reyes says.

How Do I Report the Sale of My Home on My Income Taxes?

You may not have to. Says Reyes: “If you have a gain on your home that is under the exclusion, you do not have to report this on your tax return. If you do have a gain that is above the exclusion, you must report it on the Schedule D of your 1040.” For most people, yes, but there may be some complications to consider. We’ll run through some of the bigger ones.

The home is a rental. Is this a house that you don’t live in? Or maybe you did 10 years ago and then you rented it out, and now you’re selling the home? Even if you are making less than $250,000 or $500,000, you will be paying taxes on the sale. But keep in mind: If you lived in the house for a minimum of two years within the last five years, and you rented it out for the remainder of that period, you will avoid paying taxes if the profits are under the $250,000 or $500,000 thresholds.

The home is a vacation home or a second home. Again, you’ll be paying taxes on the house. It needs to be your primary residence.

Within the last two years, you sold a home – and claimed the $250,000 or $500,000 exclusion. So, you sold a house and didn’t have to pay the taxes on it? Awesome. But you did that 20 months ago? You will probably have to pay taxes.

Did You Say Probably?

You might be able to get an exclusion, or at least a partial one. This is one of those cases where it wouldn’t be a bad idea to talk to a tax preparer. In fact, whenever you are selling or buying, it’s generally a good idea to talk to a tax preparer to see how the home will affect your taxes. But if you sold a house 20 months ago and bought a new house with your spouse, and now you’re divorcing and selling the home to one or the other, you might be able to get an exclusion.

You may also be able to get an exclusion if your spouse died, and now you’re forced to sell the house.

If you lost your job and are now receiving unemployment benefits, you can probably get an exclusion.

But getting a partial or full exclusion doesn’t have to involve a tragic reason. For instance, if you and your spouse are having twins, triplets or even more kids, and you have suddenly outgrown the house, you may be able to get an exclusion. If that’s the case, you’ll want to talk to a tax preparer, and along with all of the parenting and baby books you’re buying, consult the IRS’s “Publication 523 (2019), Selling Your Home.”

Credit given to: Geoff Williams, Contributor for US News published May 20, 2020.

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

This Week’s Author, Mark Bradstreet, CPA

–until next week.

Bonus Depreciation: A Simple Guide for Businesses February 17, 2021

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

In our tax and business planning meetings, we tend to drone on forever about the use of accelerated depreciation methods. Not that long ago, our first choice was Section 179; and, Section 168 (bonus depreciation) was our second choice. Reason being that, unlike Section 179, Section 168 was originally for NEW property only. That has changed in the last few years and now qualifying property for Section 168 may be NEW OR USED. Also, unlike Section 179, Section 168 does not have a ceiling on qualifying purchases. The business plan is a fundamental tool and is necessary for a startup that needs a sense of direction. The business plan also typically includes a brief look at the industry within which the business will operate and how the business will differentiate itself from the competition. If you are looking for professional Business Plans Writers make sure to check out this url https://wimgo.com/s/usa/business-plan-writers/.

Who doesn’t love a bonus? If you purchase fixed assets for your business, one bonus you want to get familiar with is bonus depreciation. Here’s a look at what you need to know about this valuable tax-saving tool.

What is bonus depreciation?

Depreciation allows a business to write off the cost of an asset over its useful life, or the number of years the asset will be used in the business. For example, if you purchase a $10,000 piece of machinery that you’ll use for ten years, rather than expense the full $10,000 in year one, you might write off $1,000 per year for ten years.

That $1,000 write-off is nice, but it might not be enough of an incentive to encourage you to reinvest in your business–and Congress wants business owners to stimulate the economy by purchasing assets. That’s why they invented bonus depreciation.

Bonus depreciation is a way to accelerate depreciation. It allows a business to write off more of the cost of an asset in the year the company starts using it.

Thanks to the Tax Cuts and Jobs Act of 2017 (TCJA), a business can now write off up to 100% of the cost of eligible property purchased after September 27, 2017 and before January 1, 2023, up from 50% under the prior law. However, that 100% limit will begin to phase down after 2022. Starting in 2023, the rate for bonus depreciation will be:

To take advantage of bonus depreciation:

Step 1: Purchase qualified business property.

Qualified business property includes:

Step 2: Place the property in service

Placing property in service means you have to start using the asset in your business. For example, if you purchase a piece of machinery in December of 2020, but don’t install it or start using it until January of 2021, you would have to wait until you file your 2021 tax return to claim bonus depreciation on the machinery.

Step 3: Claim bonus depreciation on your tax return

You can write off up to 100% of the cost of the asset on Form 4562, which gets filed along with your business tax return.

Frequently asked questions about bonus depreciation

Depreciation is complicated, so many business owners have questions about when and how bonus depreciation applies to their business. Here are some common ones.

Do I have to take bonus depreciation?

If you purchase depreciable property in your business, depreciating the property isn’t optional–it’s required.
But bonus depreciation isn’t mandatory. If you purchase property that qualifies for bonus depreciation, and for whatever reason don’t want to write off 100% of the cost, you can elect not to take it. Instead, you can use the applicable MACRS depreciation method instead.

Is bonus depreciation the same as Section 179?

Business owners often confuse bonus depreciation with the Section 179 deduction because they both allow a business to write off the cost of qualified property immediately. While these two tax breaks serve a similar purpose, they aren’t the same.

A business can’t claim Section 179 unless it has a taxable profit. For example, if your business has $5,000 of taxable income before taking the Section 179 deduction into account, and you purchase a $10,000 piece of machinery, your Section 179 deduction is limited to $5,000. At that point, you can opt to claim regular depreciation on the remaining $5,000 or carry your unused Section 179 deduction forward and deduct it in a future tax year.

On the other hand, bonus depreciation isn’t limited by the business’ taxable income. Returning to the previous example, you could take a Section 179 deduction of $5,000 to reduce your taxable income to zero, then take bonus depreciation for the remaining $5,000.

Are there different bonus depreciation rules for vehicles?

Depending on the type and size of the vehicle, there may be different bonus depreciation limits. The IRS sets different limits for vehicles to keep people from claiming large tax deductions on luxury cars or ones that are used mainly for personal driving.

For example, vehicles with a gross vehicle weight (GVW) rating of 6,000 pounds or less are limited to $8,000 of bonus depreciation in the first year they’re placed in service.

On the other hand, heavy vehicles with a GVW rating above 6,000 pounds that are used more than 50% for business can deduct 100% of the cost.

Can I claim bonus depreciation on used property?

The TCJA expanded the definition of qualified property to include used property. Previously, only new assets were eligible for bonus depreciation.

However, to be eligible for bonus depreciation, the property must meet the following requirements:

Bonus depreciation can be a valuable tax break for businesses that purchase furniture, equipment, and other fixed assets. However, depreciation laws and limits are always changing.

Before you decide to buy property, it’s a good idea to talk to your tax professional to be sure you’re making the right move for your business.

Credit Given to:   Janet Berry-Johnson, CPA. This article was published on November 3, 2020.

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

This Week’s Author, Mark Bradstreet, CPA

–until next week.

A Checklist of Business Deductions January 6, 2021

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

Sara Sugar has created a list of small business deductions as shown below.  It is a great list to scan through and see if you have been overlooking any tax deductions.  Always fine to call us with any questions or comments you may have.

                                 -Mark Bradstreet

THE ULTIMATE LIST OF SMALL BUSINESS TAX DEDUCTIONS

Every small business owner wants to save money — and small business tax deductions are one way to do exactly that.

This list of 37 deductions will take you from “Ugh, taxes” to “Taxes? I got this.”

1. Vehicle Expenses.
Keep records during the year to prove the use of your car, truck or van, for business, especially if you also use the vehicle for personal reasons. When it’s time to pay taxes, you can choose to deduct your actual expenses (including gasoline, maintenance, parking, and tolls), or you can take the more straightforward route of using the IRS standard mileage rate — 58 cents per mile in 2019.

Whether you’re running errands in your own car or making deliveries in your bakery van, track the mileage and run some numbers to see which method gives you the higher deduction. If you drive a lot of miles each year, it makes more sense to use the standard mileage deduction when filing taxes. However, if you have an older vehicle that regularly needs maintenance, or isn’t fuel efficient, you might be able to get a larger deduction by using your actual expenses vs. the IRS mileage rate.

Either way, we all know that gas, repairs, parking, and mileage add up, so taking advantage of the standard mileage rate, or deducting your actual expenses, is a no-brainer way to put some of that money back in your pocket. Just make sure you keep records diligently to avoid mixing personal expenses with business ones.

2. Home Office.
Do you run part of your small business out of your home, maybe doing the books in the evenings after you’ve parked your food truck for the night? Or perhaps you run an entirely home-based business. For many self-employed individuals and sole proprietors, it’s pretty standard to have a space at home that’s devoted to your work. The key here is the word devoted. Sometimes doing work on at the kitchen table while your kids do their homework doesn’t count as a home office. You must have a specific room that’s dedicated to being your office in order for it to be tax deductible.

Calculating the size of your deduction is primarily related to the amount of your home that’s used as an office. For example:

Total square footage of your home / divided into square footage used as an office = the percentage of direct and indirect expenses (rent, utilities, insurance, repairs, etc.) that can be deducted.

We highly recommend that you read the IRS’ literature on this particular tax deduction, and/or speak with a tax professional before filing taxes with this deduction. It’s one of the more complicated ones available to small business owners, and there have been numerous court cases and controversies over the years. When dealing with the potential for a costly audit, it pays to be safe by consulting a professional tax preparer rather than sorry.

3. Bonus Depreciation.
If you buy new capital equipment, such as a new oven for your pizzeria, you get a depreciation tax break that lets you deduct 100 percent of your costs upon purchase. Under the Tax Cuts and Jobs Act, 100% bonus depreciation only pertains to equipment purchased and placed in use between September 27, 2017 and January 1, 2023 — something to keep in mind as you plan for new equipment purchases in the next few years.

It’s important to note that according to the IRS, the asset you purchase must meet the following three requirements:

A few things that don’t count as assets include:

4. Professional Services.
As a small business, you don’t have in-house accountants or attorneys, but that doesn’t mean you can’t deduct their services. If you hire a consultant to help you grow your gift shop’s outreach, the fees and overall expense you pay for those services are deductible. Make sure the fees you’re paying are reasonable and necessary for the deduction to count by checking with the appropriate IRS publication or a tax professional. But you’d do that anyway, wouldn’t you?

5. Salaries and Wages.
If you’re a sole proprietor or your company is an LLC, you may not be able to deduct draws and income that you take from your business. However, salaries and wages that you pay to those faithful part-time and full-time employees behind the cash register are indeed deductible.

However, this doesn’t just stop at standard salaries and wages. Other payments like bonuses, meals, lodging, per diem, allowances, and some employer-paid taxes are also deductible. You can even deduct the cost of payroll software and systems in many cases.

6. Work Opportunity Tax Credit.
Have you hired military veterans or other long-term unemployed people to work behind your counter? If so, you may be eligible to take advantage of the Work Opportunity Tax Credit of 40 percent of your first $6,000 in wages.

7. Office Supplies and Expenses.
If you’re running a frozen yogurt shop, when you hear the word “supplies,” you probably think of plastic spoons. However, even if your business doesn’t have a traditional office, you can still deduct conventional business supplies and office expenses, as long as they are used within the year they’re purchased, so set up a file for your receipts. Many times, you can also deduct the cost of postage, shipping, and delivery services so if mail-order is a part of your business, be sure to keep track of this cost.

8. Client and Employee Entertainment.
Yes, you can take small business deductions for schmoozing your clients, as long as you do indeed discuss business with them, and as long as the entertainment occurs in a business setting and for business purposes. In some cases, you can’t deduct the full amount of your entertainment expenses, but every bit helps.

Here are some tips to guide when and what you can deduct:

(Please note:  the TCJA affected Meals & Entertainment deductions beginning in 2018.)

9. Freelance/Independent Contractor Labor.
If you bring in independent contractors to keep your checkout lines moving during the holidays or to create new marketing materials for your shop, you can deduct your costs. Make sure you issue Form 1099-NEC to anyone who earned $600 or more from you during the tax year.

10. Furniture and Equipment.
Did you buy new chairs for your eat-in bakery or new juicing blenders for your juice bar this year? You have a choice regarding how you take your small business tax deduction for furniture and equipment. You can either deduct the entire cost for the tax year in which it was purchased, or you can depreciate the purchases over a seven-year period. The IRS has specific regulations that govern your choices here, so make sure you’re following the rules and make the right choice between depreciation and full deduction.

11. Employee Benefits.
The benefits that businesses like yours offer to employees do more than attract high-quality talent to your team. They also have tax benefits. Keep track of all contributions you make to your employees’ health plans, life insurance, pensions, profit-sharing, education reimbursement programs, and more. They’re all tax-deductible.

12. Computer Software.
You can now deduct the full cost of business software as a small business tax deduction, rather than depreciating it as in years past. This includes your POS software and all software you use to run your business.

13. Rent on Your Business Location.
You undoubtedly pay rent for your pet store or candy shop. Make sure you deduct it.

14. Startup Expenses.
If you’ve just opened your gift shop or convenience store, you may be able to deduct up to $5,000 in start-up costs and expenses that you incurred before you opened your doors for business. These can include marketing and advertising costs, travel, and employee pay for training.

15. Utilities.
Don’t miss the small business tax deductions for your electricity, mobile phone, and other utilities. If you use the home office deduction, your landline must be dedicated to your business to be deductible.

16. Travel Expenses.
Most industries offer some form of trade show or professional event where similar businesses can gather to discuss trends, meet with vendors, sell goods and discuss industry news. If you’re traveling to a trade show, you can take a small business deduction for all your expenses, including airfare, hotels, meals on the road, automobile expenses – whether you use the IRS standard mileage rate or actual expenses – and even tipping your cab driver.

There are also deductions for expenses that might not immediately come to mind, like:

In order for your trip to qualify for a travel deduction, it must meet the following criteria:

As with all deductions, it’s imperative that you keep receipts and records of all business travel expenses you plan to deduct in case of an audit.

17. Taxes.
Deducting taxes is a little tricky because the small business deduction depends on the type of tax. Deduct all licenses and fees, as well as taxes on any real estate your business owns. You should also deduct all sales taxes that you have collected from the customers at your deli. You can also deduct your share of the FICA, FUTA, and state unemployment taxes that you pay on behalf of your employees.

18. Commissions.
If you have salespeople working on commission, those payments are tax-deductible. You can also take a small business tax deduction for third-party commissions, such as those you might pay in an affiliate marketing set-up.

19. Machinery and Equipment Rental.
Sometimes renting equipment for your coffee shop or concession stand is beneficial to your bottom line, since you can deduct these business expenses in the year they occur with no depreciation.

20. Interest on Loans.
If you take out a business line of credit, the interest you pay is completely deductible as a small business tax deduction. If you take out a personal loan and funnel some of the proceeds into your business, however, the tax application becomes somewhat more complicated.

21. Inventory for Service-Based Businesses.
Inventory normally isn’t deductible. However, if you’re a service-based business and you use the cash method of accounting (instead of the standard accrual method typically used for businesses with inventory), you can treat some inventory as supplies and deduct them. For instance, if you’re an ice cream shop but you sell your special hot fudge sauce as a product, your inventory may be deductible. Consult a tax professional to see if you qualify.

22. Bad Debts.
Did you advance money to an employee or vendor, and then not receive repayment or the goods or services you thought you were contracting for? If so, you may be able to treat this bad business debt as a small business deduction.

23. Employee Education and Child Care Assistance.
If you go above and beyond with your employee benefits, you may be able to take small business tax deductions for education assistance and dependent care assistance. The IRS is pretty much rewarding you here for being a great employer. So, take a bow, and the deduction.

24. Mortgage Interest.
If your business owns its own building, even if it’s just a hot dog stand, you can deduct all your mortgage interest.

25. Bank Charges.
Don’t forget to deduct the fees your bank charges you for your business accounts. Even any ATM fees are deductible.

26. Disaster and Theft Losses.
If your business is unfortunate enough to suffer theft or to be the victim of a natural disaster during the year, you may be able to turn any losses that your insurance company didn’t reimburse into a small business tax deduction.

27. Carryovers From Previous Years.
Some small business tax deductions carry over from year to year. For instance, if you had a capital loss in a previous year, you may be able to take it in the current year. Specifics often change from year to year, so make sure you’re up to date on the latest IRS regulations.

28. Insurance.
The insurance premiums you pay for coverage on your business is all tax-deductible. To qualify, your insurance must provide coverage that is “ordinary and necessary.”

This could include coverage for:

There are a few insurance types that you can’t deduct, the most common being life insurance. If you’re not sure whether you can deduct a certain type of insurance, and that deduction is an important factor in your decision, please speak with a tax professional first and save yourself any unnecessary expenses.

29. Home Renovations and Insurance.
Did you take a deduction for a home office already? If so, business expenses related to any renovations to that part of your home are also deductible, and so is the percentage of your homeowner’s insurance that covers that part of your home. Remember, all small business deductions related to home offices only apply if you use part of your home exclusively for business.

30. Tools.
The IRS distinguishes between tools and equipment. While you may have to capitalize on equipment rather than deducting it in one year, you can deduct tools that aren’t expensive or that have a life of only a year or less. And for the IRS, “tools” doesn’t just refer to hammers or screwdrivers; your spatulas and cookie sheets are tools as well.

31. Unpaid Goods.
If your business produces goods rather than providing a service, you can deduct the cost of any goods that you haven’t been paid for yet.

32. Education.
Did you attend any seminars, workshops or classes in the past year that were designed to help you improve your job skills? Your work-related educational expenses may be deductible, especially if they’re required to keep up or renew a professional license. Remember, they have to be work-related. If you own a bar or cafe, you won’t be able to deduct skiing lessons.

33. Advertising and Marketing.
You already know that providing amazing goods and services isn’t enough to make your business succeed. You also need to advertise so your potential customers can find you. Advertising and marketing dollars can add up fast, but fortunately, they are all tax-deductible.

This is great news since advertising and marketing are often of the biggest business expenses that small businesses need to deal with as they get off the ground. Rest assured, you can deduct everything from flyers to billboards to business cards, and even a new website. Political advertising is the biggest exception to this rule. Those expenses are not deductible.

34. Charitable Deductions.
Yes, your small business can donate to charity and take a deduction for it. It can donate supplies, money, or property to a recognized charity, but pay attention to the rules before you go crazy giving stuff away. Donations of your time don’t count, and you can’t wipe out your business income with donations. Also, check with the IRS before you make a charitable deduction to make sure the organization you want to support qualifies for the deduction.

35. Cleaning and Janitorial Expenses.
You know all too well that the workday isn’t over when you flip the sign on the door to say “Closed.” If you hire any type of cleaning service, make sure you take your small business tax deduction.

36. Moving Expenses.
Did you need to move to start your business? If you’re a sole proprietor or self-employed worker and you had to move more than 50 miles for business, you may be able to deduct some of your moving expenses from your taxes. Specifically, you may be able to deduct packing and transportation costs, utility and service connection fees, and travel costs. However, you can’t deduct the cost of any meals or security deposits you’ve had to pay.

Lastly, to qualify for these deductions, you will need to remain a full-time employee of the business that required you to move for at least 78 weeks out of the following two years.

37. Intangibles like Licenses, Trademarks, and other Intellectual Property.
Most of the time, expenses related to the registering or protection of intellectual property are deductible. However, the process you go about it can differ depending on what you’re trying to deduct. Some costs must be depreciated over multiple years, while others can be fully deducted within the year in which they were incurred. For example, licensing fees are typically considered capital expenses that must be depreciated. However, trademarks can often be deducted in the same tax year. If you’re uncertain, we recommend working with a tax professional to ensure you’re in compliance with the regulations governing your specific situation.

No matter what type of small business entity you have, you have to pay quarterly estimated taxes if the business owes income taxes of $1,000 or more. Corporations only have to pay quarterly estimated taxes if they expect to owe $500 or more in tax for the year.

Before you owned a business, filing taxes was a one-time thing. But as a small business owner, you’ll have to pay the IRS four times per year. On one hand, that’s four more tax deadlines you might miss. But on the bright side, by the time your yearly tax deadline comes around, you’ll have already paid three-quarters of your tax return.

To make things even more complicated, businesses must deposit federal income tax withheld from employees, federal unemployment taxes, and both the employer and employee social security and Medicare taxes. Depositing can be on a semi-weekly or monthly schedule.

Whether you’re filing your taxes quarterly or holding off for the next annual deadline, you should begin preparing for your taxes by keeping records of your expenses as of January of each year. Make sure to document each of these small business tax deductions by keeping physical receipts and writing down the business reason for the expense on your receipts as soon as you receive it.

With this comprehensive list of small business tax deductions, you’ll be well on your way to saving on your taxes this year. However, deductions can be tricky, it’s always best to consult a tax expert for any questions that might arise to ensure you are complying with all regulation and avoid any penalties.

Credit given to Sara Sugar. Published in MONEY & PROFITS on Jan 21, 2020.  

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

This Week’s Author, Mark Bradstreet, CPA

–until next week.

Home Ownership – Unmarried Partners December 9, 2020

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

Owning a home may be difficult under the best of conditions. Added complexities occur when buying a residence with an unmarried partner.  Home purchases are nearing a 14 year high in the USA. And, the number of unmarried partners living together has almost tripled in the last twenty (20) years.

Many of the concerns of purchasing a home with another individual may best be solved by viewing this transaction as a business venture (which it really is).  Partnership agreements are best addressed by a real estate and business attorney. The attorney will address an operating agreement that includes what happens if the partnership breaks up or someone dies. Also, included will be in whose name will the home be titled, credit scores, who has and deducts the mortgage interest expense, how you and your partner are going to share ongoing expenses including repairs and real estate taxes. As in any business – having a joint banking account solely for the home expenses is a great idea.

Many of the above ideas were taken from the following article, How to Buy a Home Together When You’re Not Married, by Veronica Dagher which was published in the WSJ on November 4, 2020. 

                                         -Mark Bradstreet


As U.S. home sales rise to a 14-year high and families search for larger spaces in quarantine, more unmarried couples may be considering buying a house together. For them, there is a different set of risks, both financial and practical, to consider.

The number of unmarried partners living together nearly tripled in the past two decades to 17 million, with a notable increase among those aged 65 or older, according to the U.S. Census Bureau. In turn, some financial advisers are getting more requests for advice from couples of all ages who want to buy a home together but have no interest in getting married.

For example, Andrew Feldman, a financial planner in Chicago, recently received a call from one of his clients who is living with her boyfriend and his two children. They are running out of space and she intends to buy a house within a few weeks and have him pay rent to help cover the mortgage.

While this would work out well for everyone in the short-term, it is risky because, on her current budget, it would be very difficult for her to keep the house without his help.

“The upside is easy but the downside is a big unknown,” said Mr. Feldman.

Here’s a guide for what to consider before you buy a place together.

How do you know if you and your partner are financially ready to buy a house?

If you haven’t discussed how you and your partner share money and expenses, you’ll want to do that first before committing to buying a house, said Mark Reyes, a financial planner at Albert, a financial-planning app.

Make sure you discuss your finances with full transparency, including any debts or income that the other partner isn’t aware of. You’ll also need to decide if and to what extent you’ll share finances going forward, he said.

It will be important to discuss how repairs, property taxes and other home expenses will be shared or handled. Having a joint bank account dedicated to house expenses such as repairs may be a good idea, he said.

Who should apply for the mortgage?

Unmarried couples buying a home together can benefit from greater flexibility when applying for a mortgage, said Bill Banfield, executive vice president of capital markets at Rocket Mortgage.

They have the opportunity to put their “best foot forward” by having the individual with the most income, best FICO and best debt-to-income go through the application process, he said.

The buyer who is more qualified can be the only one on the mortgage and this could result in a favorable interest rate and mortgage terms if the other partner has a low credit score, for example.

The mortgage holder will be solely responsible for the entire debt, so if you break up and you hold the mortgage, you’ll owe all the money, he said.

Lenders also let both partners apply for the mortgage together—allowing incomes and debts to be combined. The lowest of the two FICO scores, however, will be used. Applying together could allow the couple to borrow more, depending on their financial situation.

Who should hold the title to the house?

How the house is titled is crucial.

Depending on your situation, you’ll want to make sure that you and your partner discuss the legality of homeownership with your respective, independent lawyers, said Mr. Reyes, the financial planner at Albert. Titling options include sole ownership, joint tenancy with rights of survivorship, or tenants in common.

Titling can play a crucial role during a breakup or when one partner dies. It will also determine who gets how much equity in the house. For example, if the higher earner in the relationship is listed as the sole owner of the house, the other partner is basically “renting” to live there and has no ownership stake in the house if they break up, he said.

If the couple own property as tenants in common and the deceased partner doesn’t name the surviving partner as the beneficiary of the house, the survivor could become a co-owner with their late partner’s relatives or heirs, said Tom McLean, a financial planner in Olympia, Wash.

For younger couples, tenants in common tends to be the most common form of titling, as each often wants to have an ownership stake but may not want the other person to inherit that stake (as would be the case if they owned the home in joint tenancy with rights of survivorship), said Avi Kestenbaum, a partner at Meltzer, Lippe, Goldstein & Breitstone.

What if we break up?

If the relationship doesn’t work out, there are some key questions the couple will need to answer, Mr. Kestenbaum said, such as will there be a forced sale (where the couple is forced to sell the home even though one party may not wish to), or can one partner buy out the other and for what price, and how will the proceeds be split?

Mr. Kestenbaum recommends a written and signed legal agreement, such as a simple partnership agreement solely dealing with the home, to answer these questions and to also spell out each of the parties’ rights and obligations, even if the relationship continues.

What are the tax benefits?

One of the benefits to buying a home as an unmarried couple is the ability to bunch itemized deductions on one person’s tax return and take the standard deduction on the partner’s tax return, said Alexandra Demosthenes, a certified public accountant and financial planner in Boca Raton, Fla.

If the couple were married but filing separate tax returns, they’d have to either both itemize or both take the standard deduction. However, when the couple isn’t married, one individual can itemize their deductions (if the total is higher than the standard), claiming the mortgage interest, property taxes and all other allowable deductions, while their partner can choose to take the standard deduction.

This could maximize deductions for the couple over and above what they could claim as a married couple, resulting in maximum tax savings, she said.

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.

Tax Tip of the Week | No. 336 | The Tax Extenders in Detail January 6, 2016

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

Tax Tip of the Week | January 6, 2016 | No. 336 | The Tax Extenders in Detail

Congress finally passed “The Protecting Americans from Tax Hikes Act of 2015”. This was the long anticipated bill that will finally extend more than 50 tax provisions that have left tax payers in doubt over the last several years.  One nice thing about this last-minute tax bill, unlike in prior years, is that many of the tax laws have been marked permanent. Others have been extended through 2019 and others through 2016.  So we will at least know what the tax laws will be for two whole years! The following is a summary of the major “Extender” changes:

Permanent Changes:

The Research & Development credit;

Increased expensing limitations and treatment of certain real property as Section 179 property;

The exclusion of 100% of gain on certain small business stock;

Reduction in S corporation recognition period for built-in gains tax;

The enhanced Child Tax Credit;

The enhanced American Opportunity Tax Credit;

The enhanced Earned Income Tax Credit;

The deduction for certain expenses of elementary and secondary school teachers;

The deduction of state and local general sales taxes;

The special rule for contributions of capital gain real property made for conservation purposes;

Tax-free distributions from individual retirement plans for charitable purposes;

The charitable deduction for contributions of food inventory;

The tax treatment of certain payments to controlling exempt organizations;

Basis adjustment to stock of S corporations making charitable contributions of property;

The employer wage credit for employees who are active duty members of the uniformed services;

15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements;

The treatment of certain dividends of regulated investment companies;

The Subpart F exception for active financing income;

The minimum low-income housing tax credit rates for non-federally subsidized buildings;

The following provisions were extended and modified through 2019:

Bonus depreciation, at 50 percent for 2015-2017 and phased down to 40 percent in 2018 and 30 percent in 2019;

The Work Opportunity Tax Credit, modified and enhanced for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) to 40 percent of the first $6,000 of wages;

The New Markets Tax Credit, providing $3.5-billion allocation each year through 2019, the carryover period for the credit has also been extended to 2024.

And the following are revived and extended through 2016:

Modification of the exclusion of mortgage debt discharge;

Mortgage insurance premiums treated as qualified residence interest;

The above-the-line deduction for qualified tuition and related expenses; and,

Over a dozen incentives for energy production and conservation.

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.

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.

Tax Tip of the Week | No. 284 | Tax Extenders Passed January 7, 2015

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

Tax Tip of the Week | Jan 7, 2015 | No. 284 | Tax Extenders Passed

In case you didn’t hear…

Just before Christmas, Congress finally passed the “tax extenders” for 2014. These “extenders” refer to a set of about 60 tax incentives that are scheduled to lapse after a certain number of years.  We have seen Congress act at the last minute three times in the past:  October 2008, December 2010 and January 2013.

Perhaps Finance Chairman Ron Wyden (D-, Oregon) said it best: “Congress is turning in its tax homework eleven-and-a-half months late and expects to earn full credit”.

In any event, we now know for sure that we can use the following popular tax breaks when preparing your 2014 tax return:

–    Section 179-businesses can elect to immediately deduct up to $500,000 for equipment purchases vs. depreciating over a number of years
–    Bonus Depreciation- allows businesses to claim an additional 50% first year depreciation on new equipment purchases
–    Teachers Classroom Expense Deduction- $250 maximum
–    Mortgage Insurance Premium Deduction (PMI)
–    Higher Education Deduction- $4,000 maximum
–    State and Local Sales Tax Deduction-in lieu of income tax deduction
–    Mortgage Debt Exclusion-if primary home is foreclosed
–    Charitable Distributions from IRAs –if over 70.5 years old
–    Charitable Deduction if making a Conservation Easement
–    Research Tax Credit
–    Work Opportunity Tax Credit
–    100% Exclusion for Gain on Qualified Small Business Stock

These are only some of the most commonly used tax incentives that were extended for 2014.  Also note that all of these incentives are subject to various rules and regulations.

Also be aware that Congress granted these extensions for 2014 only! Hopefully, we will not have to wait so long to know what the 2015 tax code will look like.

We’ll keep you posted.

 

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.

Depreciation Options for Small Business Owners | Tax Tip of the Week | No. 79 February 9, 2011

Posted by bradstreetblogger in : Section 168, Tax Tip, Taxes, Uncategorized , 1 comment so far

There were a lot of last minute changes made in the tax code regarding how you can deduct capital assets you purchased.  Rather than depreciating business property over several years, these optional methods allow you to expense certain property in the year placed in service.

Section 179

This optional method of accelerating depreciation allowances has been in the tax code for years.  However, the limits have changed many times.  Here are the current rules:

Section 168

This is sometimes called “Bonus Depreciation” and is relatively new.  It can be used in conjunction with a Section 179 election or in lieu of a Section 179 election.  The latest rules are:

Confused?  This is only the summary—we can’t wait to tell you all the details!  You will definitely want to call us if contemplating these deductions.

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.