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Energy Credit Incentives for Individuals February 24, 2021

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

The below information regarding home energy credits was taken directly from the IRS website. I was reluctant to pull the same information from a contractor’s website. Not always, but sometimes, they are a bit over-zealous in their interpretation of the tax law when it comes to business. Buyer beware!

Please remember that a tax credit typically reduces your income taxes dollar for dollar. A tax deduction reduces your taxable income. Your federal income tax is based upon your taxable income. So, all things being the same a federal credit is typically worth more than a federal tax deduction.

If you are considering some home energy improvements of some sort, please be sure to do your homework on whether they may qualify. Also, please pay particular attention to the expiration dates below for different types of home energy improvements. 

                                               -Mark Bradstreet

Q. Are there incentives for making your home energy efficient by installing alternative energy equipment?

A. Yes, the residential energy efficient property credit allows for a credit equal to the applicable percent of the cost of qualified property. Qualifying properties are solar electric property, solar water heaters, geothermal heat pumps, small wind turbines and fuel cell property. Only fuel cell property is subject to a limitation, which is $500 with respect to each half kilowatt of capacity of the qualified fuel cell property. Generally, this credit for alternative energy equipment terminates for property placed in service after December 31, 2021. The applicable percentages are:

  1. In the case of property placed in service after December 31, 2016, and before January 1, 2020, 30 percent.
  2. In the case of property placed in service after December 31, 2019, and before January 1, 2021, 26 percent.
  3. In the case of property placed in service after December 31, 2020, and before January 1, 2022, 22 percent.

Q. Is a roof eligible for the residential energy efficient property tax credit?

A. In general, traditional roofing materials and structural components do not qualify for the credit. However, some solar roofing tiles and solar roofing shingles serve as solar electric collectors while also performing the function of traditional roofing, serving both the functions of solar electric generation and structural support and such items may qualify for the credit. Components such as a roof’s decking or rafters that serve only a roofing or structural function do not qualify for the credit.

Q. Does any guidance issued for the energy credit under section 48 of the Internal Revenue Code apply to the residential energy efficient property tax credit under section 25D of the Internal Revenue Code?

A. IRS guidance issued with respect to the energy credit under section 48 in publication items such as Notice 2018-59, has no applicability to the residential energy efficient property credit under section 25D.

Q. What improvements qualify for the residential energy property credit for homeowners?

A. In 2018, 2019 and 2020, an individual may claim a credit for (1) 10 percent of the cost of qualified energy efficiency improvements and (2) the amount of the residential energy property expenditures paid or incurred by the taxpayer during the taxable year (subject to the overall credit limit of $500).

Qualified energy efficiency improvements include the following qualifying products:

Residential energy property expenditures include the following qualifying products:

Please note that qualifying property must meet the applicable standards in the law.

The residential energy property credit, which expired at the end of December 2014, was extended for two years through December 2016 by the Protecting Americans from Tax Hikes Act of 2015. The Consolidated Appropriations Act, 2018 extended the credit through December 2017. The nonbusiness energy property credit expired on December 31, 2017 but was retroactively extended for tax years 2018, 2019 and 2020 on December 20, 2019 as part of the Further Consolidated Appropriations Act.  The credit had previously been extended by legislation several times. See Notice 2013-70 PDF for more information on this credit as well as the credit for alternative energy equipment.

Q. Who qualifies to claim a residential energy property credit? Are there limitations?

A. You may be able to take these credits if you made energy saving improvements to your principal residence during the taxable year. In 2018, 2019 and 2020, the residential energy property credit is limited to an overall lifetime credit limit of $500 ($200 lifetime limit for windows). There are also other individual credit limitations:

The residential energy property credit is nonrefundable. A nonrefundable tax credit allows taxpayers to lower their tax liability to zero, but not below zero.

Published on the IRS Website – October 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.

Small Business Tax Deduction Checklist February 3, 2021

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

We receive a ton of questions regarding what is tax deductible. If the expense is associated with your business then it is most likely deductible. As a side note, many people are unaware that upon starting a new business, your personal assets that are now used in the new business may be deducted as an expense or as depreciation expense. Those personal assets have now been converted to from personal use to business use. They may be deducted at their fair market value at the time they were placed into service. Fair market value is typically defined as “garage sale” value. These assets may include computers, faxes, phones, copiers, printers, desks, chairs, tables, etc. The article that follows drills down further with a list of some common business tax deductions.

The not-so-good news? Every business needs to file taxes. The great news? There are many expenses you can apply to your income to help alleviate your tax burden. These deductions will reduce your profits, meaning that you will pay lower overall taxes. While the IRS does not specifically list what you can claim, they do state that if a cost you’ve incurred is “ordinary and necessary” to running your business, then you can deduct it.

We’ve created a checklist below of most of the deductions you can claim for your small business. As always, check with your accountant or tax preparer if you have any questions or need clarification. Note that some of the expenses listed below will need to be “depreciated” or expensed over several years. Speak to your tax preparer for more information.

Rent, Mortgage, and Utility Tax Deductions

These tax deductions include costs associated with renting a building for business, using part of your home as an office, utility bills, and other factors. 

Rent and Mortgage Expenses

Utility Bills Expenses

You cannot claim a telephone landline unless it is specifically dedicated to your business. You can claim a percentage of your mobile phone bill depending on how much you use your mobile phone for business.

Office Expenses and Tax Deductions

You can take additional deductions on money you spend for your business office.

Office Furniture Expenses

Office Computer Expenses

Office Software Expenses

Office Equipment Expenses

Office Supplies and Sundries Expenses

Office Maintenance and Repairs Expenses

Employee Expenses and Tax Deductions

If you pay a salary to employees, then you can deduct some of those costs from your business revenue. Employee expenses and taxes can be complex, so we recommend speaking to an accountant or tax preparer to understand what you can deduct.

Freelance, Contractor, and Professional Tax Deductions

You can claim costs for professional services like tax preparation or legal fees, and for paying freelancers or other contractors to complete work for your business.

Accountancy Expenses

Legal Expenses

Freelance and Contractor Expenses

Car and Vehicle Tax Deductions

If you use a vehicle in part or exclusively for your business, you can deduct those costs. You can either track everything individually, or use the IRS mileage rates.

Advertising and Marketing Tax Deductions

You can deduct any money you spend on promoting your business.

Travel and Accommodation Tax Deductions

If you travel or stay away from home for business, those costs are deductible.

Loan Interest and Bad Debt Tax Deductions

If you have taken out loans for your business, you can deduct the interest.

Education and Training Tax Deductions

When you provide training to yourself or your staff, those costs can be deducted.

Payment and Bank Fee Tax Deductions

Your bank is likely to charge you for business services, and you’ll also pay a fee for accepting charge, credit, or debit cards.

Insurance Tax Deductions

You can deduct insurance premiums incurred by your business:

Qualified Business Income Tax Deductions

Depending on the type of business you run, and subject to certain limits, you can claim up to 20% of your profits as a tax deduction. Speak to your accountant about this, as it can be a complex area.

Miscellaneous Tax Deductions

Depending on the type of business you run, there are potentially dozens of other areas you can expense. 

We hope you’ve found this small business tax deductions checklist useful. This list is not exhaustive, but it will give you a good starting point for your expenses. As always, talk to a professional tax preparer or accountant about your unique tax circumstances to ensure you’re claiming expenses correctly.

Credit given to Lisa Xiong and published on March 6, 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.

What You Need to File your Taxes January 20, 2021

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

Our job includes minimizing your income tax liability both in the short-term and long-term. Our ability to do so is closely tied to the accuracy and completeness of the information given us. Our client tax organizer and checklist are designed to help you report your income and deductions to us.  When your tax organizer and checklist are not completed, we may not know what we don’t know. Always, a good idea to call, mail, text or email any new events or questions during the year so we may either give you immediate suggestions and/or be on the alert during your tax preparation.

The following article by the Taxslayer Blog Team is written from the 30,000 feet view. Our tax organizer and checklist are more comprehensive. But the article will give you a starting point for gathering your tax information. 
                                                                                                                                                                                                -Mark Bradstreet

Tax Prep Checklist: Everything You Need to File Your Taxes

If you’d rather do something – anything – other than filing your taxes, remember that the sooner you file, the sooner you’ll get your refund. To make the e-filing process quicker, gather your forms and documents before you begin. Below is a checklist of the basic forms and records you’ll need to make slaying your taxes a cinch. 

Personal Information 

Income and Investment Information 

Self-Employment and Business Records (where applicable) 

Medical Expense Receipts and Records 

Charitable Donations 

Other Homeownership Info 

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.

Happy New Year!! December 30, 2020

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

And get ready for the tax filing season.

Hopefully, you followed some of the suggestions outlined in Publication 552 to organize your records.  If you did, great!  This will make filing your tax returns a lot easier this year.  It also means that you and your tax advisor can spend more time on tax and financial planning issues for 2021 vs. looking back to 2020.

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

W-2:    Employers should mail these by 2/1/21.  If you have moved during the year, make sure former employers are aware of your new address. Some employers provide W-2’s to their employees via a website. Be sure to login and print out your W-2 after it is available.

W-2G:    Casinos, Lottery Commissions and other gambling entities should mail these by 2/1/21 if you have gambling winnings above a certain threshold.  Note:  Some casinos will issue you a W-2G at the time you win a jackpot.  Make sure you have saved those throughout the year.

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

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

1099-NEC:   This form, NEW for 2021, reports the total paid during the year to a single person or entity for services provided. Certain Medicaid waiver payments may be excludable from the income as difficulty of care payments. 

1099-MISC:  This form will be used to report miscellaneous income such as rent or payments to an attorney, legal settlements, or prize or award winnings.

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

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

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

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

K-1s:    If you are a partner, member or shareholder in a partnership or S corporation, your income and expenses will be reported to you on a K-1.  The tax returns for these entities are not due until 3/15/21 (if they have a calendar-year accounting).  Sometimes, you may not receive a K-1 until shortly after the entity’s tax return is filed in March.

If you are a beneficiary of an estate or trust, your share of the income and expenses for the year will also be reported on a K-1.  These returns will be due 4/15/21 so you might not receive your K-1 before the due date of your Form 1040.

NOTE:  Many times corporations, partnerships, estates and trusts will put their tax returns on extension.  If they do, the due date of the return is not until 9/15/21 or later.  We often see client’s receiving K-1s in the third week of September.

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

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

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

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

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

–until next week

Special Holiday Edition December 23, 2020

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

Enjoy the Holidays!

We are going to take a break from our tax and business tips this week.  Instead, the family of Bradstreet & Company would like to wish you and your family the most joyous holiday season and best wishes for 2021.

We hope you enjoy the Tax Tip of The Week.  As always, your topic suggestions and questions are always appreciated.

Is the Tax Tip of the Week real?

While your kids are questioning if Santa is real, we continue to receive some interesting feedback that some of you don’t realize this is really Bradstreet CPAs reaching out each week (… some suspect this is a “packaged” communication to which we add our logo.) Well, rest assured it’s us and we love to hear from you.
Enjoy the week and, “Yes Virgina, there is a Santa Claus”.

Wishing you all great things,

The Staff at Bradstreet & Company

Tax Loss – Harvesting December 16, 2020

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

I am not a financial planner nor a stockbroker. And, as we have heard a million times over, “Past performance is no guarantee of future results.” Having gotten these typical disclaimers out of the way, let’s discuss what tax-loss harvesting is all about.

The long story short is that tax-loss harvesting is often referred to as selling securities at a loss to offset a capital gains tax liability. Usually, the end goal is to limit the taxation of short-term capital gains. This is important since higher federal income taxes are imposed on short-term capital gains as opposed to long-term gains.

Some cautions –

  1. Wash rule – some investors may sell a security for harvesting purposes but later wish to add it back to their investment portfolio. That is fine BUT wait 31 days for the purchase or the original loss will be disallowed by the IRS. 
  2. Harvesting tax losses will defer paying the capital gain tax. When you die the tax basis on your stocks (current tax law) will be “stepped-up” to their fair market value. Thusly, the untaxed capital gains will go untaxed. 
  3. Capital losses are limited to an annual $3,000 deduction. The good news is that unlike many other carryforwards, capital loss carryforwards never expire during one’s life. However, they do not survive your death.  In the year that a spouse dies and a return is filed jointly, the losses from one spouse’s brokerage account may be used to offset the other spouse’s gains. 

Ideas and excerpts above came from a WSJ article, 2020 Was Perfect for Tax-Loss Harvesting. It was written by Mr. Neal Templin and published in the WSJ on November 9, 2020. It contains additional planning points and offers greater in-depth explanations. This article is reprinted below for further reading.

                                   -Mark Bradstreet



This is the kind of year that was made for tax-loss harvesting.

The tactic, used to legally reduce or avoid altogether capital-gains taxes, is especially useful in years when a jarring market slide is followed by a strong rebound. That’s why this year, with the market’s plunge in March and subsequent recovery to record highs, was ideal for this strategy.

In January and February, New York money manager David Frisch sold winning stock positions in the brokerage account of client Mike Soffer, generating $20,000 in capital gains. In March, as the market plummeted, Mr. Frisch sold losing positions in Mr. Soffer’s account, creating tax losses to offset the gain. Plus, he banked an additional $15,000 in tax losses that Mr. Soffer can use in the future to offset gains.

Mr. Soffer, a commercial mortgage broker in Old Bethpage, N.Y., can also use the banked tax losses to offset up to $3,000 a year in ordinary income. “It’s money earned by not paying taxes,” he says.

If you didn’t sell stocks during the March market slide, it’s too late to create tax losses from it now. But fret not. There will be more opportunities in the future. Even in up years for the market, there are dips where investors can book tax losses.

When those opportunities come around, here are a few things to keep in mind about harvesting tax losses.

1. Don’t run afoul of the wash rule.

If you sell something and repurchase it or a substantially similar security within 30 days, the Internal Revenue Service won’t allow you to count it as a tax loss. That’s called the wash rule.

Money managers typically don’t want to spend 30 days out of the market when they create a tax loss for a client. They could miss out on upswings, like April of this year. So as soon as they sell an investment to create a tax loss, they buy an equivalent investment that is different enough to satisfy the wash rule.

When money manager Joseph Favorito of Melville, N.Y., sold S&P 500 index funds in March to create a tax loss for clients, he frequently bought Russell 1000 index funds. Both types of funds own large-cap stocks and they perform similarly.

The switch allowed his clients to stay invested in the market. “After the market bottomed out in March, we had the 50 best days in market history,” Mr. Favorito says. “If you missed that, you missed a lot.”

2. Try to accomplish other goals as you create tax losses.

It’s a good practice to rebalance your holdings regularly, selling stocks or funds that have climbed and buying ones that have lagged behind. That’s a great time to create tax losses. To do this efficiently, you need to know the cost basis of your holdings (generally the price at which you bought a security), so you know if you’re creating a loss or a gain when you sell them. If you bought shares of a certain company at various times, you will create a greater tax loss by selling the shares you acquired at the highest price.

If you’ve spent years working for a single company, your portfolio may be concentrated in a single stock. That’s risky. Advisers would tell you to sell at least part of your holdings and replace it with a diversified portfolio of stocks. If you do this during a downturn, you may be able to create a tax loss that you can use to offset gains for years to come.

3. Harvesting tax losses can allow you to defer paying capital-gains taxes, and in some cases to never pay them.

Suppose you buy shares in Mutual Fund A for $100,000 and their value falls to $50,000. You sell the shares and buy $50,000 of Mutual Fund B and book a $50,000 tax loss. You use it to offset a $50,000 gain on the sale of a second home.

Five years later, the value of your Mutual Fund B shares has climbed to $100,000. You sell them. Your cost basis is $50,000, because that’s what you paid for Mutual Fund B. If you sell it for $100,000, you will owe taxes on a $50,000 capital gain. What you’ve done is to defer the capital-gains tax you avoided five years earlier when you sold the home.

Even better is finding new opportunities to create tax losses during those five years to offset your $50,000 gain on Mutual Fund B so that it, too, is untaxed.

When you die, under current law your heirs will inherit your assets with a “stepped up” cost basis, meaning that any untaxed capital gains have been erased as far as the IRS is concerned. That’s another reason why avoiding taxation on capital gains during your life is a smart strategy. That tax may never be paid.

4. When you expire, so do your tax losses.

A tax loss can be used anytime over the lifetime of the account holder, but not beyond. But there is an important wrinkle in the tax law that married couples should keep in mind. During the final year that a couple files jointly after one spouse dies, the losses from one spouse’s brokerage account can be used to offset gains by the other spouse.

5. Will the election change the calculus?

President-elect Joe Biden has said he supports raising the top capital-gains tax rate to 39.6% and taxing appreciated assets at the time of death. Both would mean big tax increases over the current regimen, where the top capital-gains rate is 23.8% and appreciated assets are passed tax-free to heirs. Some investors may sell winners, figuring they’re better off biting the bullet before tax rates rise.

Marianela Collado, a Plantation, Fla., money manager, says she won’t tell her clients to take gains based on a Biden win. Even if the law changes under Mr. Biden, it could change back under the next president, she says.

For now, Ms. Collado is making hay under the current rules. She has a client who sold a building in January, generating a $1 million capital gain. She told her client to set aside $238,000 to cover taxes.

Then, in March, she sold mutual funds owned by the client and immediately bought different funds with similar aims. In doing so she created a $500,000 tax loss, which will offset half of her client’s capital gain from the building sale.

“What we did in those few weeks is going to save him about half that tax,” she says.

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.

Amended Tax Returns November 25, 2020

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

Filing an amended tax return is far from uncommon. In 2018, 3,500,000 were filed with the IRS. Amended tax returns are often needed for a large number of wide-ranging reasons. Some of the more common ones include receiving a late Form 1099 or a late Schedule K-1 or any other relevant information after your tax return was filed. Or, the cause for amending may be as simple as a math error which was not discovered until a later date. Keep in mind, that filing an amended return with the IRS often prompts filing amended returns for other tax entities such as your state, city and school district. For the most part today, these tax entities are linked. So, if an amended return is filed with the IRS – the other tax entities are notified of that change. So, they are now expecting an amended return as well. Not filing it with them usually prompts some nasty correspondence. Refunds created from filing amended returns are often a pleasant surprise; not so much fun if they cause a tax balance due. Many tax entities limit the time for which a refund claim may be filed. The IRS says the amended return for a refund must generally be filed within three years after the date the original return was filed or within two years after the date the tax was paid whichever is later. 

An article, If You Want to File an Amended Tax Return, authored by Tom Herman as published in the WSJ on September 14, 2020 follows.


                                     -Mark Bradstreet


Much to their chagrin, millions of taxpayers each year discover significant errors, omissions and other miscues on returns they already have filed.

Mastering all the details of knowing how to handle problems such as these can be surprisingly tricky. But the Internal Revenue Service recently took an important step toward making the process of filing an amended federal income-tax return easier.

Until recently, taxpayers who wanted to amend their federal income-tax return had to file Form 1040-X the old-fashioned paper way—even if they had filed their original return electronically. Then, in August, the IRS reversed course and said taxpayers generally can file amended returns electronically for last year with tax-preparation software.

“This is a significant and a very welcome development,” says Stephen W. DeFilippis, owner of DeFilippis Financial Group, a wealth-management and tax firm in Wheaton, Ill., and an enrolled agent (a tax specialist authorized to represent taxpayers at all levels of the IRS). This will make the amending process “easier for everyone: taxpayers, practitioners and the IRS,” he says.

“E-filed returns are generally processed faster, more efficiently and contain fewer errors than paper-filed returns,” says Alison Flores, principal tax research analyst at the Tax Institute at H&R Block Inc. “Similar results are likely to extend to Form 1040-X.” She says H&R Block has already begun e-filing amended returns for customers.

The IRS received nearly 3.5 million amended income-tax returns in 2018.

The e-filing option is also a timely change. Because of the coronavirus pandemic and other issues, IRS workers have been struggling to open and process unusually large mountains of mail. But it remains to be seen how much this new e-filing option will affect how long it takes for the IRS to respond to amended returns. The waiting time can vary significantly based on the facts, circumstances and complexity of each taxpayer’s situation.

As with so many tax issues, there are important exceptions and other fine print to consider for amended returns, filed electronically or on paper. If you’re planning to make amends, here are a few points to consider:

Limited scope
At this stage, the e-filing option for amended returns applies only for Forms 1040 and 1040-SR for the 2019 tax year. “Additional improvements are planned for the future,” the IRS said. Also, only taxpayers who e-filed their original Form 1040 or 1040-SR for 2019 can e-file an amended return, notes Ms. Flores of H&R Block.

Taxpayers who want to amend returns for more than one tax year must file for each year separately, says Eric Smith, an IRS spokesman. “So, for example, if you are amending multiple years and one of them is 2019, we urge you to e-file for 2019 and then send separate 1040-X forms” in separate envelopes for each of the other years, he says. “However, you decide to send it, it’s a good idea to keep any receipt or other evidence you do have that it was sent, whether it’s through one of the mailing or shipping options offered by the U.S. Postal Service or one of the authorized private delivery services,” he adds. “Also, be sure to keep a copy of your return.”

For refunds claimed in amended returns filed electronically, as with the paper 1040-X form, “we don’t currently offer direct deposit, but that’s one of the further enhancements we hope to make in the future,” Mr. Smith says.

Time limits
Generally, to claim a refund, you must file Form 1040-X “within three years after the date you filed your original return or within two years after the date you paid the tax, whichever is later,” regardless of how you file, the IRS says. “Returns filed before the due date (without regard to extensions) are considered filed on the due date, and withholding is deemed to be tax paid on the due date.”

But there are special rules for “refund claims relating to net operating losses, foreign tax credits, bad debts, and other issues.” For example, the IRS says a Form 1040-X based on a “bad debt or worthless security” generally must be filed “within seven years after the due date of the return for the tax year in which the debt or security became worthless.”

Common flubs
Among the classic reasons for amending: You forgot to include taxable income. You didn’t realize you were eligible for various credits, deductions or other valuable breaks. You claimed breaks you now realize you weren’t entitled to take. You need to correct your tax-filing status, or perhaps you received new information from a partnership or a financial institution that differs significantly from what you originally were told.

Another possible reason is that you were affected by a natural disaster in a place later designated as a federally declared disaster area. In such cases, victims have the option of claiming unreimbursed casualty losses for the year in which the disaster occurred—or on the previous year’s return (which typically would mean amending the return for that year).

For example, those who suffered losses from Hurricane Laura or California wildfires this year could deduct those losses on their returns for 2020 or 2019, whichever works out better. The Federal Emergency Management Agency provides a list of disaster declarations.

Some people also may benefit from several tax laws enacted near the end of 2019 that could affect their returns for prior tax years.

Other considerations
Some errors don’t require an amended return. The IRS says it may correct math or clerical errors on a return and even accept returns filed “without certain required forms or schedules.”

There are other circumstances when you shouldn’t file Form 1040-X. For example, the IRS says you shouldn’t amend to ask for “a refund of penalties and interest that you have already paid.” Instead, file Form 843.

In certain other cases, such as where criminal issues might be involved, consider consulting a skilled tax pro.

Lastly, if you amend your federal return, check to see whether you also may need to amend state tax returns and how to do so.

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.